What Is a ‘Volatility Oracle’ and How Is It Used in Options Pricing?
A volatility Oracle provides a measure of the expected price fluctuation of an asset to the smart contract. This data is critical for calculating the option's premium (or price) using models like Black-Scholes.
Unlike a price Oracle which provides the current spot price, the volatility Oracle feeds a variable that determines the probability of the option expiring in-the-money, thus affecting its fair value.
Glossar
Volatility Oracle
Mechanism ⎊ A volatility oracle is a specialized decentralized service designed to securely retrieve, aggregate, and deliver real-time or implied volatility data to smart contracts for use in crypto derivatives pricing and risk management.
Price Fluctuation
Volatility ⎊ Price fluctuation within cryptocurrency, options trading, and financial derivatives represents the degree of dispersion of potential returns, quantified by standard deviation or implied volatility derived from option pricing models.