What Is “Implied Volatility” in Options Trading?
Implied volatility (IV) is a forward-looking metric that represents the market's expectation of how much the price of the underlying asset will fluctuate over a specific period. It is a key input into options pricing models and is derived by working backward from the current market price of an option.
High IV suggests the market anticipates large price swings, making options more expensive (higher premium). IV is distinct from historical volatility, which measures past price movement.
MEV-induced price spikes can cause short-term distortions in IV.
Glossar
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Options Pricing Models
Models ⎊ Options Pricing Models are mathematical frameworks, such as Black-Scholes or binomial trees, adapted to calculate the theoretical fair value of derivative contracts based on underlying asset dynamics and market parameters.
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.