Volatility Quoting, specifically within institutional crypto options trading and Request for Quote (RFQ) systems, refers to the practice where market makers provide bid and ask prices for options contracts not as absolute fiat or crypto values, but as implied volatilities. This standardizes options pricing across various strike prices and maturities. It offers a relative measure.
Mechanism
Instead of directly quoting a premium value for an option, a market maker quotes an implied volatility percentage. This implied volatility is then input into a recognized options pricing model, such as Black-Scholes or its crypto-adapted variants, to derive the actual option premium. This method facilitates more consistent and efficient price communication, as volatility is a primary determinant of option premiums.
Methodology
The strategic approach involves market makers dynamically calculating and adjusting implied volatility surfaces based on real-time market data, the supply and demand dynamics for options, and their internal risk assessments. This necessitates sophisticated quantitative models and low-latency systems to generate and transmit precise volatility quotes, enabling institutional clients to assess relative value across a range of crypto options with accuracy.
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