How Does Implied Volatility Factor into Options Margin Calculations?
Implied volatility is a critical input because it reflects the market's expectation of future price movement. Higher implied volatility leads to higher calculated option premium and thus a greater potential for loss.
Margin models incorporate volatility shifts in their stress scenarios, which directly increases the initial margin requirement.
Glossar
Constant Volatility Assumption
Foundation ⎊ The Constant Volatility Assumption, within cryptocurrency options and financial derivatives, posits that volatility remains stable over the life of the option contract, a simplification frequently employed in pricing models like Black-Scholes.
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 Shifts
Skew ⎊ Volatility shifts, particularly in cryptocurrency options, frequently manifest as changes in the skew ⎊ the difference in implied volatility between out-of-the-money puts and calls.
Implied Volatility Factor
Indicator ⎊ : This metric, derived from current option prices via models like Black-Scholes, serves as the market's consensus forecast of future asset price dispersion.