How Does Implied Volatility (IV) Affect the Size of the Option Premium?
Implied volatility (IV) is a measure of the market's expectation of future price swings for the underlying asset. It is the most significant factor in determining the extrinsic (time) value of an option.
Higher IV means the market expects larger price movements, increasing the probability of the option ending up in-the-money. Therefore, a higher IV directly results in a higher option premium, all else being equal.
Dictionary
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.
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.