What are Implied and Realized Volatility in DeFi Options?

Learn about Implied and Realized Volatility in DeFi Options!

Implied and Realized Volatility

Implications of volatility in DeFi options

💡 In this article, you will learn about:

Volatility in DeFi Options

Understanding Implied Volatility

If the markets are implying a high level of volatility for an asset like ETH, the price is expected to move a lot in the future. 

If the markets are implying a low level of volatility for an asset like ETH, the price is expected to move less.

Realized Volatility: Historical Price Movement

Realized volatility is an indicator of the actual historically recorded price risk of an underlying asset.

Implied volatility is an indicator of the expected future price risk of an underlying asset.

Implications for Traders and Investors in DeFi

Pricing

Implied Volatility in DeFi

3.1 Implied and Realized Volatility

Understanding Moneyness

What is Moneyness?

In-the-Money (ITM) Options

A call option is in-the-money when the option's strike price is lower than the current market price of the asset.

A put option is in-the-money when the option's strike price is higher than the current market price of the asset.

Out-of-the-Money (OTM) Options

A call option is out-of-the-money when the option's strike price is higher than the current market price of the asset.

A put option is out-of-the-money when the option's strike price is lower than the current market price of the asset.

At-the-Money (ATM) Options

Conclusion

3.2 Understanding Moneyness

What is Intrinsic and Extrinsic Value in DeFi Options?

Learn about Intrinsic and Extrinsic Value in DeFi options!

Intrinsic and Extrinsic Value

The basics of intrinsic and extrinsic value in DeFi options

Factors affecting intrinsic and extrinsic value

Key implications for DeFi options traders

💡 In this article you will learn about:

What is Intrinsic Value?

Factors Affecting Intrinsic and Extrinsic Value

Higher implied volatility will result in a higher extrinsic value of an option, as the market expects larger price swings, and the option is more likely to become profitable.

The time remaining until expiration also affects an option's extrinsic value. The longer the time remaining until expiration, the more time the option has to become profitable, and therefore, the higher the extrinsic value.

Finally, interest rates can affect the extrinsic value of an option. If interest rates are high, there is a higher cost of carrying the underlying asset, which increases the extrinsic value of call options and decreases the extrinsic value of put options.

Determining the Value of DeFi Options

Hedging: Options with a lower extrinsic value may be more suitable for hedging, as they offer more protection in the event of a market downturn. 

Leverage: If you are looking to leverage your position, options with a higher extrinsic value may provide greater potential for profit. However, that's not all there is to it - remember to consider multiple factors before making an investment decision.

Takeaways

3.3 Intrinsic and Extrinsic Value

Introduction to The Greeks

What Are "The Greeks"?

Delta

If a call option has a Delta of 0.6, it means that for every $1 movement in the underlying asset price, the option's price will move by approximately $0.60.

Gamma

A higher Gamma means that the option's price becomes more sensitive to changes in the underlying asset price. If an option has a gamma of 0.08, it means that for every $1 increase in the underlying asset price, the option's delta will increase by 0.08. 

Theta

If a call option has a Theta of -0.05, it means that the option's value will decrease by $0.05 per day due to time decay.

Vega

If an option has a Vega of 0.10, it means that the option's price will increase by $0.10 for every 1% increase in implied volatility.

If a call option has a Rho of 0.04, it means that the option's price will increase by $0.04 for every 1% increase in interest rates.

In Summary

Delta measures the rate of change in the option price relative to changes in the underlying asset price.

Gamma measures the rate of change in an option's delta relative to changes in the underlying asset price.

Theta measures the rate of time decay in an option's value.

Vega measures the sensitivity of an option's price to changes in implied volatility.

Rho measures the sensitivity of an option's price to changes in interest rates.

3.4 Introducing The Greeks

Test your knowledge gained from the Intermediate DeFi Options Concepts course!

Exam: Intermediate DeFi Options Concepts

3.5 Exam: Intermediate DeFi Options Concepts

Increase your DeFi options knowledge with these essential concepts!

Increase your DeFi options knowledge with intermediate concepts!

Course overview

3. Intermediate DeFi Options Concepts

3.1 Implied and Realized Volatility

3.2 Understanding Moneyness

3.3 Intrinsic and Extrinsic Value

3.4 Introducing The Greeks

3.5 Exam: Intermediate DeFi Options Concepts