How Is Implied Volatility Used to Calculate the Theoretical Value of a Crypto Option?

Implied volatility (IV) is a necessary input for option pricing models like Black-Scholes. Once the IV is derived from the current market price of an option, it is plugged into the model along with the other inputs (asset price, strike, time, RFR) to calculate the theoretical fair value.

Arbitrageurs look for options whose market price deviates significantly from this calculated theoretical value to identify mispricing.