How Does Implied Volatility in Options Contracts Affect the Potential for Price Slippage on Large Orders?
High implied volatility (IV) significantly increases the potential for price slippage. High IV means the market expects large price swings, which leads to wider bid-ask spreads and a less stable order book.
When placing a large options order in a high IV environment, the price can move quickly and unfavorably between the execution of different parts of the order. The initial tranches might fill at one price, but the rapidly changing market can cause later tranches to fill at much worse prices, resulting in significant slippage.
Glossar
Price Slippage
Variance ⎊ Price slippage, within cryptocurrency, options, and derivative markets, represents the difference between the expected trade price and the actual execution price.
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.
Bid-Ask Spreads
Spread ⎊ The bid-ask spread represents the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) for a given cryptocurrency derivative, option, or financial instrument.