How Does Implied Volatility (IV) Specifically Influence the Bid-Ask Spread of a Cryptocurrency Option Contract?

Implied volatility (IV) is the market's expectation of future price volatility, and it is a key input in option pricing. A higher IV inflates the option's premium (extrinsic value), which directly increases the potential loss for a market maker if the IV collapses or the underlying price moves against their position.

Therefore, market makers widen the option's bid-ask spread to capture a larger profit to offset the increased risk associated with the high IV.