What Role Does Implied Volatility Play in Options Pricing?
Implied volatility (IV) is a measure of the market's expectation of future price swings in the underlying asset. It is a key input in pricing models.
Higher IV leads to a higher option premium because the chance of the option expiring ITM is greater. IV is often derived by working the Black-Scholes model backward.
Glossar
Trader Profit
Execution ⎊ Trader profit within cryptocurrency, options, and derivatives contexts fundamentally arises from the differential between entry and exit prices, net of transaction costs and funding 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.
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.
Options Buyers
Premium ⎊ These participants are the counterparties who pay the premium to acquire the right to exercise the option, thereby securing potential upside leverage.
Future Price Swings
Price Projection ⎊ Future Price Swings refer to the anticipated magnitude and direction of movement in the underlying cryptocurrency price over a defined period, which is the primary variable that options strategies seek to forecast or monetize.