How Is the IV for a Specific Option Contract Calculated?
Implied volatility is not directly observed but is calculated by reverse-engineering an option pricing model, such as Black-Scholes. The current market price (mid-point of the bid-offer spread), the underlying asset's price, the strike price, time to expiration, and the risk-free rate are all plugged into the model.
The volatility variable is then iteratively adjusted until the model's theoretical price matches the observed market price, yielding the implied volatility.
Glossar
Dividend Yield
Valuation ⎊ Dividend yield, within cryptocurrency derivatives, represents the annualized return an investor hypothetically receives from staking or lending protocols, expressed as a percentage of the staked or lent asset’s value.
Iv Calculation
Calculation ⎊ of implied volatility (Iv) involves inverting option pricing models, such as Black-Scholes, to determine the market's expected future volatility for the underlying cryptocurrency asset.
Market Price
Valuation ⎊ Current rate at which a digital asset is being traded on an exchange reflects the collective sentiment of all participants.
Risk-Free Rate
Rate ⎊ The risk-free rate represents the theoretical return on an investment with zero risk, serving as a critical input in option pricing models to calculate the cost of carrying an asset forward in time, particularly relevant for valuing longer-dated crypto options.
Option Pricing
Derivatives ⎊ Option pricing is the mathematical process of determining the fair theoretical value of a derivative contract, such as a call or put, based on inputs like the underlying asset price, time to expiration, volatility, and prevailing interest rates.
Option Contract
Derivative Foundation ⎊ An Option Contract is a formalized agreement granting the holder the right, but not the obligation, to buy or sell an underlying asset, such as a cryptocurrency, at a predetermined price on or before a specified future date.