What Is Implied Volatility (IV) and How Does It Affect the Pricing of Crypto Options?
Implied volatility (IV) is the market's forecast of the underlying cryptocurrency's price fluctuation over the life of the option. It is a key input in option pricing models, such as Black-Scholes.
A higher IV indicates the market expects larger price swings, which increases the probability of the option expiring 'in-the-money.' Therefore, higher IV directly leads to a higher option premium (price).
Glossar
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
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.
Option Pricing
Framework ⎊ Option pricing within cryptocurrency derivatives necessitates a framework extending beyond traditional Black-Scholes assumptions, primarily due to the unique characteristics of digital assets.
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.
Historical Volatility
Evidence ⎊ This metric is derived from the time-series of past asset prices, representing the actual realized dispersion of returns over a defined historical window.