Convexity Bias in Options

Convexity bias in options refers to the phenomenon where the price of an option is influenced by the non-linear relationship between the underlying asset price and the option value. Because of gamma, the option's value changes more than a linear model would predict when the underlying moves significantly.

This bias means that the market-implied price of an option may differ from theoretical models if they do not correctly account for the convexity effect. In cryptocurrency, this bias is often exacerbated by high volatility and the potential for rapid price gaps.

Traders must understand this bias to avoid overpaying for options or mispricing their own positions. It is particularly relevant when building complex strategies involving multiple legs.

A firm grasp of convexity bias allows for more accurate pricing and better risk management. It represents the difference between a static delta view and a dynamic, real-world pricing reality.