Implied volatility denotes the market’s prospective estimate of an asset’s future price fluctuations, derived from the current prices of its options contracts. In contrast, realized volatility measures the actual historical price dispersion of an asset over a defined past period.
Mechanism
Implied volatility is computationally extracted from option premiums using financial models, reflecting market participants’ collective expectations of future uncertainty and risk. Realized volatility is calculated empirically from historical price series, typically as the annualized standard deviation of logarithmic returns, quantifying the asset’s past price variability.
Methodology
The comparison between implied and realized volatility is a critical analytical methodology for options traders and risk managers. When implied volatility significantly exceeds realized volatility, it suggests that options are overpriced relative to historical movements, potentially creating selling opportunities. Conversely, if implied volatility is lower, options may be considered undervalued. This divergence forms the basis for various arbitrage and hedging strategies in crypto institutional options trading, capitalizing on anticipated mean reversion or persistent mispricings.
We use cookies to personalize content and marketing, and to analyze our traffic. This helps us maintain the quality of our free resources. manage your preferences below.
Detailed Cookie Preferences
This helps support our free resources through personalized marketing efforts and promotions.
Analytics cookies help us understand how visitors interact with our website, improving user experience and website performance.
Personalization cookies enable us to customize the content and features of our site based on your interactions, offering a more tailored experience.
