How Does Supply and Demand for Options Affect Implied Volatility?
Implied volatility is heavily influenced by the supply and demand dynamics of the options market. If there is high demand for an option, particularly for downside protection like put options during market uncertainty, buyers will bid up the price.
This increase in the option's market price, when fed back into the pricing model, results in a higher implied volatility. Conversely, if there is an oversupply of options or low demand, the option prices will fall, leading to lower implied volatility.
It reflects the market's collective appetite for risk.
Glossar
High Demand
Momentum ⎊ The confluence of elevated trading volume and sustained price appreciation, particularly within cryptocurrency derivatives and options markets, defines high demand.
Supply and Demand Dynamics
Equilibrium ⎊ The theoretical state where the quantity of a crypto derivative demanded by speculators and hedgers precisely matches the quantity supplied by market makers and liquidity providers.
Supply and Demand
Equilibrium ⎊ The interplay of supply and demand within cryptocurrency, options, and derivatives markets establishes a dynamic equilibrium price, reflecting the aggregate intentions of buyers and sellers.
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.
Demand
Momentum ⎊ The observable inclination for an asset or derivative to persist in its prevailing price trend, demand within cryptocurrency markets, particularly for options and futures, reflects this inertia.