Why Is a “Volatility Skew” Common in Cryptocurrency Options Markets?
A volatility skew is common in cryptocurrency options because market participants typically demand higher premiums (and thus imply higher volatility) for OTM put options than for OTM call options. This reflects the market's fear of a sharp, sudden downside move (a crash) in the highly volatile crypto assets.
This imbalance in demand for downside protection creates the characteristic "skew" in the implied volatility curve.
Glossar
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.
Cryptocurrency Options
Volatility ⎊ Cryptocurrency options, fundamentally derivatives, grant the holder the right, but not the obligation, to buy or sell a specified cryptocurrency at a predetermined price on or before a specific date.
Market Participants
Agency ⎊ Cryptocurrency market participants functioning as central entities exhibit roles distinct from decentralized actors.
Flat Volatility Curve
Definition ⎊ A Flat Volatility Curve describes a scenario in the implied volatility surface where the implied volatility values for options across different expiration dates are nearly identical, showing minimal term structure.
Volatility Skew
Bias ⎊ This term describes the non-symmetrical relationship between implied volatility levels for options with different strike prices, indicating a market bias toward expecting larger moves in one direction.
Downside Protection
Mitigation ⎊ Downside protection, within cryptocurrency and derivatives markets, represents strategies designed to limit potential losses stemming from adverse price movements.