Volatility Structures in crypto markets refer to the term structure and strike price dependencies of implied volatility, as reflected in cryptocurrency options prices. This describes how implied volatility varies across different option expiration dates (term structure) and different strike prices (volatility skew or smile).
Mechanism
These structures are derived from options market data, where implied volatility is backed out of options prices using established pricing models. The observed shape of the volatility curve, including the steepness of the term structure and the pronouncedness of the smile or skew, provides insights into market participants’ expectations about future price movements and tail risk.
Methodology
Interpretation and utilization principles involve analyzing the dynamics of these structures to identify potential mispricings, gauge market sentiment, and construct options strategies. A steep upward-sloping term structure might indicate expectations of future uncertainty, while a pronounced volatility skew suggests a premium for downside protection, influencing risk-adjusted portfolio decisions.
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