How Does the Concept of “Tail Risk” Influence the Pricing of Out-of-the-Money (OTM) Crypto Options via RFQ?

Tail risk is the risk of extreme, low-probability events (the "tails" of the distribution) that can cause massive price movements in the underlying crypto asset. OTM options benefit disproportionately from these extreme moves.

Due to the "fat tails" observed in crypto price distributions, market makers price OTM options with higher implied volatility than predicted by a standard normal distribution. This higher IV, often seen as the volatility skew, results in a wider, more expensive RFQ quote to cover the increased tail risk.