Thread by @0xBobdbldr

1/ One of the essential factors I was interested to learn how to trade in options was implied volatility.

So in this thread, I went through important points that I found + how IV is being implemented in #Defi 🕳️ :

2/ #Impliedvolatility is a probabilistic calculation for how much the market is expecting a certain asset to vary in price, e.g supply/demand factor :

- IV high > options Demand high > expecting volatility
- IV low > options supply high > expecting neutral / slow deviations

3/ #Vega is the first derivative of the option value with respect to the volatility.
And it is a great indicator that helps us understand IV effects over options prices by measuring how the price variates if the implied volatility changed by 1%. = S.sqr(t).N’(d1)

4/ We learn 2 important things from Vega :

1- It nearly peaks at the money, so if the mark price = strike price , any changes in IV will have a large effect on the option price. This effect gets lower as the strike price is far from the mark price

5/ 2- As there is a sqr(t) in vega’s formula, Options price sensitivity decrease as we approach maturation, so even if there is high volatility, IV factor won’t affect the options price if we are very close to expiry

7/ How IV is being implemented in #OpFi protocols :

@dopex_io : Black-Scholes pricing model powered with SVI IV parameters from collaborated option MMs + it accounts volatility smiles to allow anyone to buy options based on different strikes

8/ @lyrafinance : Accounting for volatility smiles depending on the strike traded and the asset volatility and by that generating a market-driven variance fee that will increase/decrease the option price

9/ @PremiaFinance : controlling supply/demand ratio through an indicator called C-Level that will calculate the utilization ratio of each pool.
So if the ratio is high > if Demand is high > C is high > options price is high

10/ This difference in pricing can create delta-neutral arbitrage opportunities with 10-15% APR that could be implemented automatically.
@FactorDAO , you might want to consider adding this later on, i would be happy to help

11/ That’s it for this thread, understanding Implied volatility and its implementation in #defi will lead you to :

1- Know from which marketplace to buy
2- learn how to buy low and sell high , but not only the token chart , but on the IV chart as well

Peace 🐈‍⬛