Implied Volatility Asymmetry describes a market phenomenon in crypto options where implied volatilities for options with varying strike prices but identical expiration dates exhibit a non-flat distribution, often presenting as a skew or curve. Its purpose is to reflect diverse market expectations of price movements and perceived risk across different price levels.
Mechanism
This asymmetry originates from supply and demand dynamics within the options market, where institutional traders and market makers adjust bids and offers for out-of-the-money options to account for perceived tail risks, such as large downside price shifts. It results from pricing models that incorporate non-normal distribution assumptions for underlying asset returns.
Methodology
The methodology involves quantitative models that extract implied volatilities from observed options prices and plot them against corresponding strike prices. This systematic observation allows traders to assess market sentiment regarding extreme price events, informing option trading strategies and risk management by providing insights into potential future price distribution characteristics.
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