How Does the Concept of “Event Risk” Affect Option Pricing?
Event risk is the risk of a sudden, unpredictable, and significant price change due to a specific future event, such as a major regulatory decision or a network upgrade (like The Merge). This risk causes the implied volatility (IV) of options to spike dramatically leading up to the event.
This spike increases the option's premium, reflecting the greater uncertainty. Once the event passes, if the price movement is smaller than expected, the IV will typically "crush," leading to a drop in option price.
Glossar
Network Upgrade
Catalyst ⎊ A network upgrade within cryptocurrency infrastructure represents a fundamental alteration to the protocol’s operating parameters, often driven by the need to enhance scalability, security, or introduce novel functionalities like improved smart contract capabilities.
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.
Price Change
Volatility ⎊ Price change refers to the fluctuation in the market value of an underlying asset over a specified period.
Time to Expiration
Decay ⎊ Time to Expiration, within cryptocurrency options and financial derivatives, represents the remaining lifespan of a contract before its termination and potential exercise or assignment.
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.
Event Risk
Trigger ⎊ Event Risk, within cryptocurrency derivatives, represents the exogenous shocks capable of inducing substantial shifts in market pricing, often exceeding those predicted by standard volatility models.