Implied Volatility
Understand implied volatility in crypto options: model input/output logic, realised versus implied volatility, skew, term structure, event premium and IV crush.
Reading progress — saved on this device
Implied volatility (IV) is the volatility level that makes an option-pricing model consistent with the observed market price, given the model’s other inputs. It is therefore a market-implied pricing quantity—not a promise that realised volatility will equal that number.
What implied volatility actually is
Option price reflects several inputs: underlying price, strike, time, carry assumptions and volatility. If the market option premium is observed, an option model can be inverted to solve for the volatility assumption consistent with that premium. That solved value is implied volatility.
IV is often quoted on an annualised basis so different strikes/expiries can be compared, but annualisation does not mean the asset is expected to move by exactly that amount over a year.
IV is a surface, not one number
For one underlying, different strikes and expiries can trade at different IVs:
- Skew: downside puts may command different IV than comparable upside calls.
- Smile: far strikes can carry higher IV than at-the-money options.
- Term structure: near-dated IV may differ sharply from longer-dated IV, especially around known events.
| Observation | Possible interpretation | What it does not prove |
|---|---|---|
| Near-term IV > long-term IV | Event/short-term risk priced | That realised vol must spike |
| Put IV > call IV | Downside protection demand / skew | That price must fall |
| IV rising with flat spot | Option risk premium increasing | That direction is known |
Implied versus realised volatility
Realised volatility measures actual historical price variation over a defined sampling/window. Implied volatility is inferred from option prices. Their difference is central to volatility trading, but comparison requires matching horizon and methodology.
A trader buying options can be directionally correct yet lose if the realised move is too small/late and IV falls. A seller can collect decay during quiet conditions but face large losses if realised movement and IV surge together.
Worked example: IV crush without a spot move
A one-month at-the-money call trades at £5,000 before a major event while IV is elevated. Immediately after the event, spot remains near £80,000, but uncertainty collapses and the same option (with slightly less time remaining) trades at £3,200.
The buyer loses £1,800 mark-to-market despite essentially no adverse spot move. The option was exposed not only to direction but also to volatility and time. Conversely, a short option benefited in this snapshot but still carried potentially large event-gap risk beforehand.
This is the intuition behind an IV crush: option premiums can fall because the volatility component reprices after uncertainty resolves.
Common mistakes and misunderstandings
- Calling IV the market’s prediction of the exact future price range.
- Comparing IV across expiries without matching time horizon.
- Assuming “high IV” automatically means options should be sold.
- Ignoring skew and looking only at one at-the-money IV number.
- Attributing all option P&L to spot direction.
Knowledge checkpoint
Q1. Why can option premium fall sharply while spot is almost unchanged?
Q2. What is the conceptual difference between implied and realised volatility?
Q3. Why should IV be compared across both strike and expiry?
Q4. Why is annualised IV not an exact forecast of a one-year move?
FAQ
❓ Is IV a forecast?
It is better described as a volatility level implied by market option prices under a model, not a guaranteed realised-volatility forecast.
❓ What is IV crush?
A sharp decline in implied volatility, often after uncertainty or an event resolves, which can reduce option premiums even if spot barely moves.
❓ Can puts and calls have different IV?
Yes. Strike-specific skew/smile is common; the surface reflects market supply, demand and risk pricing.
❓ Does high IV mean options are overpriced?
Not necessarily. High IV may be justified by event risk or expected dispersion; value requires a relative and realised-volatility comparison.
Summary
- IV is inferred from option prices using a model.
- It varies by strike and expiry, creating a volatility surface.
- Implied and realised volatility are different quantities.
- Option P&L can change materially from IV even without a large spot move.
Use this lesson as one component of a wider risk and execution process. Derivative specifications, margin formulas, settlement and loss-allocation rules can differ substantially between venues.
Want this in a personalised order?
Take the crypto assessment and get a custom path of 10 modules matched to what you already know. Free, no card required.
Build my path →