Implied volatility

What IV is

Implied volatility (IV) is the volatility number that, when plugged into a Black-Scholes pricing model, reproduces the option's observed market price. It's an implied forecast, the market's consensus view of how volatile the underlying will be from now to expiry.

IV is quoted annualised. A BTC IV of 60% means the market expects roughly 60% annualised volatility, translating to ~3.8% daily moves on average (60% / √252).

IV vs realised vol (RV)

Realised vol is what actually happened, typically computed as the annualised standard deviation of log returns over a recent window (7-day, 30-day are standard). RV is backward-looking; IV is forward-looking. The difference between them is one of the most actionable reads in derivatives.

• IV > RV, option market expects more movement than has recently been delivered. A premium for insurance is being paid. Sellers (vol shorts) collect the premium.
• IV < RV, realised exceeds implied. The underlying is moving more than the option market priced in. Buyers (vol longs) profit; sellers get blown out.

The historical pattern: IV > RV most of the time. Sellers collect a small premium most days and lose big occasionally. That gap is the volatility risk premium.

The vol risk premium panel

The VRP panel plots IV minus RV over time. When the line is positive, the premium is being earned by vol sellers; when negative, vol buyers are winning. Useful as context for structuring trades, sell premium when the line has been consistently positive, buy premium when it's collapsed.

Term structure

Term structure is ATM IV plotted across DTE. It tells you what IV the market is pricing for "next week" vs "next month" vs "next quarter."

• Contango (back > front): typical "calm now, more later" shape. Vol sellers prefer this, front premium decays fast while the back stays priced.
• Backwardation (front > back): stress in the front. The market expects more movement now than later. Common ahead of binary events (FOMC, CPI, large expiries) and during active sell-offs.
• Inverted near-front (very front spike): a specific event being priced. The blip says "we expect a move in the next N days then back to normal."

Model-free vol indices (DVOL)

Black-Scholes IV depends on the pricing model. A model-free vol index uses the variance-swap replication formula to compute volatility directly from the chain's option prices, without assuming a specific model. The result is robust across smile shapes.

The DVOL panel surfaces the model-free vol index alongside ATM IV. When the two diverge, the smile (skew / butterfly) is doing something specific, see the surface doc.

Vol carry

Vol carry is near-term IV minus far-term IV. A negative read (front below back, contango) means the term structure rolls down: a held position will see its vol mark decay over time, which is good for vol sellers and bad for vol buyers. A positive read (backwardation) is the opposite: rolling up.

The VCARRY panel is the time-series of this number. Useful for traders running calendar spreads, long back-month / short front-month, since carry tells you whether the trade rolls in your favour passively.