What Is Implied Volatility and How Is It Calculated for an Option?
Implied volatility (IV) is the market's forecast of a likely movement in an asset's price. It is not directly observed but is derived by inputting the current market price of an option into an option pricing model, such as Black-Scholes, and solving for the volatility variable.
IV is forward-looking and represents market sentiment regarding future price risk.
Glossar
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.
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.
Volatility Smile
Curve ⎊ The volatility smile, observed in options markets, represents the graphical depiction of implied volatility across different strike prices for options with the same expiration date.
Interest Rates
Rate ⎊ The prevailing cost of borrowing funds, expressed as an annualized percentage, fundamentally influences asset valuation across cryptocurrency derivatives, options trading, and traditional financial markets.
Option Trader
Role ⎊ An option trader is a market participant who buys and sells options contracts, which grant the right but not the obligation to buy or sell an underlying asset at a specified price.
Market Sentiment
Attitude ⎊ The prevailing sentiment within cryptocurrency, options, and derivatives markets reflects the aggregated psychological disposition of participants toward asset values and future price movements.