What Is “Implied Volatility” and Why Is It Important for Option Pricing?
Implied volatility (IV) is the market's estimate of the future volatility of the underlying asset. It is not directly observed but is derived by inputting the current option price into an option pricing model, like Black-Scholes.
IV is crucial because it is the primary driver of an option's premium (time value). Higher IV leads to higher premiums, reflecting greater uncertainty and risk in the market.
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.
Risk
Exposure ⎊ The inherent uncertainty surrounding potential losses in cryptocurrency, options, and derivatives stems from a confluence of factors, including market volatility, regulatory ambiguity, and technological vulnerabilities.
Uncertainty
Volatility ⎊ Market uncertainty is primarily expressed through volatility, which option prices reflect via implied volatility levels across the strike and term structure.
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
Measurement ⎊ Volatility, in quantitative finance, is the statistical measurement of the dispersion of returns for a given financial asset, typically quantified by the annualized standard deviation of its price movements.
Market Expectation
Forecast ⎊ Market expectation, within cryptocurrency derivatives, represents a probabilistic assessment of future asset prices or underlying conditions, derived from a synthesis of available information and informed judgment.