In Cryptocurrency Options, How Does the Underlying Asset’s Volatility Impact RFQ Quote Generation?
The volatility of the underlying cryptocurrency (e.g. Bitcoin or Ether) is the single most significant factor determining the premium and thus the RFQ quote for an option.
Higher volatility means a higher probability of large price swings, increasing the option's value and requiring a wider, more expensive quote from the liquidity provider to compensate for the higher risk. Market makers use implied volatility, often calculated from the Black-Scholes model, to price their quotes.
Extreme volatility can lead to wider spreads or even a refusal to quote.
Glossar
Quote
Basis ⎊ The expression of a desired transaction price for an asset or derivative contract at a specific point in time.
Extreme Volatility
Momentum ⎊ Within cryptocurrency derivatives and options trading, extreme volatility manifests as a rapid and sustained acceleration of price movements, often exceeding historical ranges and predictive models.