Illiquid options pricing refers to the process of valuing options contracts on cryptocurrency assets that exhibit low trading volume and wide bid-ask spreads. This condition complicates standard valuation techniques due to limited observable market data.
Mechanism
Standard options pricing models, which assume continuous trading and efficient market data, often prove inadequate for illiquid options. Their application requires significant adjustments, such as inferring implied volatility from sparse data points or applying custom volatility surfaces that account for market microstructure effects.
Methodology
The methodology involves advanced statistical techniques, Bayesian estimation, or proprietary quantitative models that factor in data scarcity, potential market impact of trades, and expert judgment. This aims to derive a theoretically sound yet practical valuation, providing critical guidance for institutional options trading decisions in nascent crypto markets.
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