What is Implied Volatility (IV)?
Implied volatility (IV) is the annualised standard deviation of returns that the options market is pricing into an option. It is not an observable quantity — it is the volatility value that makes Black-Scholes reproduce the option's market price. For Bitcoin and Ethereum options on Deribit, IV is the single most important input to pricing, skew, and term structure.
How Implied Volatility Is Calculated
Black-Scholes prices a European option as a function of six inputs: spot, strike, time to expiry, risk-free rate, dividend/carry, and volatility. All of those are observable except volatility. Given the market price of the option, we solve the inverse problem:
Deribit publishes mark IVs for every listed BTC and ETH contract, computed from a consistent mid-market price and the exchange's own crypto-specific variant of Black-Scholes. CryptoGamma consumes those IVs directly rather than re-deriving them, which keeps our surface numerically identical to Deribit's.
Implied vs Realised Volatility
- Realised volatility (RV) is computed from past returns of spot.
- Implied volatility (IV) is extracted from current option prices.
- Volatility risk premium (VRP): IV − RV. Structurally positive for liquid underlyings because insurance (options) is priced above the cost of the risk it covers.
Persistent positive VRP is why systematic short-volatility strategies generate a positive expected return — at the cost of severe left-tail risk when IV gaps higher. The Skew Analysis page surfaces IV and realised volatility side by side so you can see the current VRP.
The IV Surface: Skew and Term Structure
IV is not a single number. Because supply and demand vary across strikes and tenors, IV forms a two-dimensional surface:
Two Axes of the IV Surface
- Strike axis (smile/skew): IV plotted across strikes at a fixed expiry. Puts typically price higher IV than calls, producing the negative skew characteristic of risk-averse markets.
- Tenor axis (term structure): ATM IV plotted across expiries. Upward slope (contango) is normal; downward slope (backwardation) signals near-term stress.
BTC and ETH IV Context
- Baseline. BTC ATM IV median near 55–65%; ETH ATM IV runs a few points higher.
- Equity comparison. S&P 500 ATM IV typically sits between 12% and 25%, so crypto trades at roughly 3–5x equity IV.
- Event spikes. Regulatory news, major liquidations, and macro shocks can push BTC ATM IV above 100% in hours.
- DVOL. Deribit's own 30-day IV index is the standard single-number summary of the BTC and ETH term structure.
Frequently Asked Questions
What is implied volatility (IV)?
Implied volatility is the annualised standard deviation of returns that the options market is pricing into a specific option. It is not observed directly: it is the volatility input that makes the Black-Scholes (or a variant) pricing model reproduce the option's market price. IV rises when demand for the option rises relative to its theoretical fair value.
How is implied volatility calculated?
Given an option's market price and all other Black-Scholes inputs (spot, strike, time to expiry, risk-free rate, and for crypto a carry term), the model is inverted to solve for the single value of volatility σ that reproduces the market price. There is no closed-form inverse, so numerical methods such as Newton-Raphson or Brent are used. Deribit publishes IVs for every listed contract directly.
What's the difference between implied and realised volatility?
Realised volatility is computed from past returns of the underlying. Implied volatility is extracted from current option prices and reflects expected future returns. The difference, called the volatility risk premium (VRP), is systematically positive over time: buyers of options tend to overpay relative to what the underlying actually delivers, which rewards sellers of volatility on average.
What are typical IV levels for Bitcoin and Ethereum options?
BTC ATM IV has historically ranged from roughly 35% to 120% annualised, with a median near 55–65%. ETH ATM IV runs a few points higher than BTC most of the time. By comparison, S&P 500 ATM IV typically sits in the 12–25% band. Crypto IV spikes quickly around macro events, liquidations, and regulatory surprises.
What is DVOL and how does it relate to IV?
DVOL is Deribit's implied volatility index for BTC and ETH, constructed in a way analogous to the VIX. It aggregates ATM IVs across the front-month and next-month expiries into a single number representing expected 30-day volatility. DVOL is the most cited summary statistic for the crypto volatility term structure.
Why does implied volatility vary across strikes (the IV smile/skew)?
Supply and demand for options are not uniform across strikes. Downside puts tend to trade at a premium because of crash-hedging demand; far out-of-the-money calls can trade at a premium in crypto because of lottery-ticket buying. Plotting IV against strike produces a curve called the volatility smile or skew, which is what CryptoGamma tracks on the Skew Analysis page.
How does term structure of IV work?
Term structure is ATM IV plotted against time to expiry. An upward slope (contango) is normal: longer-dated options carry more uncertainty and therefore more implied volatility per unit time. A downward slope (backwardation) signals near-term stress — the market is pricing more volatility into the next few weeks than into the next few months.
Is high IV good or bad for option buyers?
High IV means options are expensive in volatility terms. Buyers need the underlying to move more than implied just to break even, because time value is front-loaded. Sellers benefit when realised volatility lands below implied. Experienced traders think about IV in percentile terms (for example, the 90-day IV rank) rather than absolute level.
See Live IV, Skew, and Term Structure
The Skew Analysis page charts ATM IV term structure and 25-delta skew for BTC and ETH in real time. Related reading: 25-delta skew, gamma exposure, and option delta.
View Skew Analysis