How Does Implied Volatility Affect the Price of OTM Options?
Implied volatility (IV) has a significant impact on the price of out-of-the-money (OTM) options. The entire premium of an OTM option is extrinsic value, which is heavily influenced by IV.
Higher IV means the market expects larger price swings, increasing the probability that an OTM option could become profitable before expiration. This increased probability translates into a higher premium.
Therefore, even if an option is far OTM, if the IV is high, it can still be relatively expensive.
Glossar
OTM Options
Option ⎊ An options contract, within the cryptocurrency derivatives space, represents a financial agreement granting the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset ⎊ typically a cryptocurrency or token ⎊ at a predetermined price (the strike price) on or before a specific date (the expiration date).
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.
Volatility
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Vega
Sensitivity ⎊ Vega, within the context of cryptocurrency options and financial derivatives, quantifies the rate of change in an option’s price with respect to changes in the underlying asset’s implied volatility.