How Does the Concept of ‘Implied Volatility’ Affect a Market Maker’s Strategy in Options?
Implied volatility is a crucial factor in a market maker's strategy for options. It represents the market's expectation of future price swings of the underlying asset and is a key component in pricing options.
Market makers will adjust their bid and ask prices based on their own assessment of implied volatility. If they believe implied volatility is too high, they will be more willing to sell options, and if they believe it is too low, they will be more inclined to buy them.
Their goal is to profit from the difference between their own volatility forecast and the market's implied volatility, while continuously hedging their positions.
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.
Market Makers
Function ⎊ Market Makers in cryptocurrency, options, and derivatives markets actively provide liquidity by simultaneously offering to buy and sell assets, narrowing bid-ask spreads and facilitating efficient price discovery.
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.