How Does Implied Volatility Affect the Extrinsic Value of a Crypto Option?
Implied volatility (IV) is the market's expectation of the underlying asset's future price movement. IV is the primary driver of an option's extrinsic (time) value.
As IV increases, the extrinsic value of both call and put options increases because there is a higher perceived chance that the option will end up in-the-money before expiration.
Glossar
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.
Extrinsic Value
Volatility ⎊ This component represents the portion of an option's premium driven by market uncertainty regarding the underlying crypto asset's future price movement.
Put Options
Premium ⎊ Put options, within cryptocurrency markets, represent a contractual obligation assumed by a seller to fulfill a buyer’s right to sell an underlying asset at a predetermined price on or before a specified date, functioning as a protective mechanism against downward price volatility.