How Does Implied Volatility (IV) Affect an Option’s Premium?
Implied volatility (IV) represents the market's expectation of future price swings in the underlying asset. It is the only input to an options pricing model that is not directly observable.
When IV increases, the probability of the option expiring in-the-money rises, thus increasing the option's premium. Conversely, a decrease in IV lowers the premium.
IV is directly proportional to the option price.
Glossar
Future Price Swings
Price Projection ⎊ Future Price Swings refer to the anticipated magnitude and direction of movement in the underlying cryptocurrency price over a defined period, which is the primary variable that options strategies seek to forecast or monetize.
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.
Options Pricing Model
Valuation ⎊ Options pricing models, within cryptocurrency markets, extend established financial derivative theory to nascent digital asset classes, requiring adaptation due to unique market microstructure and volatility characteristics.