How Does Implied Volatility (IV) from Token Options Influence an Investor’s Valuation Assumptions?
Implied volatility (IV) is the market's expectation of future price volatility, derived from options prices. High IV suggests the market anticipates large price swings, indicating a significant divergence between the current market price and the perceived intrinsic value.
If an investor's valuation is significantly higher than the market price, high IV suggests the market agrees a move is likely. It influences the risk premium used in DCF and the probability distribution in a Monte Carlo simulation.
IV is a key input in the Black-Scholes model.
Glossar
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.
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.
Token Options
Valuation ⎊ Token options, within cryptocurrency markets, represent contracts granting the holder the right, but not the obligation, to buy or sell an underlying crypto asset at a predetermined price on or before a specified date.
Probability Distribution
Model ⎊ The mathematical framework used to describe the probabilistic behavior of asset prices over time, such as the lognormal distribution or more complex jump-diffusion processes.
Risk Premium
Premium The Risk Premium embedded within an option's price reflects the extra compensation demanded by the market for taking on the uncertainty associated with future price volatility of the underlying cryptocurrency.