How Does Implied Volatility Affect Option Premiums?
Implied volatility (IV) is a market's estimate of the future volatility of the underlying asset's price. A higher IV indicates that the market expects larger price swings, increasing the probability that the option will end up "in the money." Therefore, a rise in implied volatility generally leads to an increase in the option's premium (price).
Conversely, a decrease in IV will typically lower the premium. IV is a crucial component of option pricing models like Black-Scholes.
Glossar
Option Pricing Models
Framework ⎊ Option Pricing Models are mathematical constructs, such as the Black-Scholes or binomial models adapted for crypto, used to calculate the theoretical fair value of an option based on several key inputs.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.