What is Implied Volatility and How Does it Impact the Nodeam High Yield Dual Investment?

By Ang Kok Wee, Head of Treasury

Implied volatility (IV) is a measure of how much people think the price of an asset will change in the future. In the context of options, it is important because it helps determine its price.

The price volatility of an underlying asset creates a framework of risk and opportunity for market participants.

The concept of volatility implies unpredictability in the dispersion and direction of the underlying asset.

For example, a highly volatile stock is like a rollercoaster, going up and down a lot. A less volatile stock is more like a calm river.

IV is a forward-looking measure.

It is a measure of the market’s forecast of the future price volatility of an underlying asset, as opposed to its historical or past volatility.

In other words, IV is what people “imply” or guess about how much a stock’s price will shake in the future. It’s not based on past movements; it’s what traders and investors think will happen.

IV is influenced by several factors:

  • Potential market-sensitive events or announcements
  • Market sentiment

So, implied volatility is all about calculating how much the price of Bitcoin will move in the future and how it plays a big role in determining the annualised percentage yield (APY) of a Nodeam HYDI product.

With all other factors remaining the same, higher implied volatility would translate to a higher APY because there’s a bigger chance that the price of Bitcoin will make rapid movements.

Lower implied volatility means a lower APY because there’s less expected movement in the price of Bitcoin.