In Options Trading, How Does Implied Volatility Relate to the Risk of Slippage?
Implied volatility (IV) reflects the market's expectation of future price swings of the underlying asset. High IV often leads to wider bid-ask spreads for the options contract itself, as market makers demand a greater premium for taking on the increased risk.
Wider spreads directly increase the potential for slippage when executing an options trade, particularly for market orders. Rapid changes in IV can also cause swift price movements, further exacerbating slippage risk.
Glossar
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.
Bid-Ask Spreads
Spread ⎊ The bid-ask spread represents the difference between the highest price a buyer is willing to pay (the bid) and the lowest price a seller is willing to accept (the ask) for a given cryptocurrency derivative, option, or financial instrument.
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.
Price Swings
Amplitude ⎊ : The magnitude of rapid price deviation, often exceeding expectations derived from standard deviation models, presents a direct challenge to margin maintenance across derivative books.