Apr 11, 2021

Cryptocurrency Volatility Indexes

 Last week I wrote about BVOL - bitcoin volatility index launch on Deribit. However this is not the first crypto volatility index. In fact last year T3 Indexes - the folks behind SPIKES volatility index launched both Bitcoin and Etherium volatility indexes, and already executed trades tied to their BitVol index on LedgerX platform. 

The first trade executed about a month ago was a call spread; the second one traded last week for a pension plan, and established a long Bitvol position via a short put spread and calls. 

As typical with new financial instruments, futures on BitVol will likely to be listed first. What their pricing may look like? We can take a clue from existing volatility indexes - where pricing is based more on the statistical properties of the process rather than no-arbitrage principles. So, let's take a look :

The chart above is the full available history of the index; median is 79 and mean is 85 - just a tad higher than the current value of 82. We see large spikes when Bitcoin rose and fell - implying both put and call skews.
 Similar to the VIX, the distribution of values is right-skewed, and log transformation makes the distribution almost normal. With the volatility of volatility of  ~ 120 it is not that much higher than that of the VIX. Trying to model the index as a simple Ornstein-Uhlenbeck (mean-reversion) process in log was kind of mess - the data is very noisy.

Eventually I was able to estimate reasonable parameters, and came up with the following short-term curve ( assuming current value of 82 ) for the next 28 days. Practically I assume that there will be monthly expirations to coincide with the monthly options expiration cycle.


In the following posts I will continue writing more about these exciting products. In the meantime, if you are an active options trader and are interested in trading Bitcoin or Ether derivatives take a look at Deribit which is the leading crypto derivatives exchange with 90% of market share. And if you have any questions about the post, feel free to reach out to my email address on the sidebar.

Mar 31, 2021

DVOL – Deribit Implied Volatility Index

DVOL volatility index

 If you woke up this morning and realized that Deribit page looks somewhat different, you're correct: today the largest crypto-derivatives exchange premiered its own real-time volatility index. The methodology is variance swap with standard liquidity adjustments. Since Deribit trades north of 90% of cryptocurrency options this is a significant and important market benchmark.

Exchange's plans are ambitions:  they are planning on launching futures on volatility index "very soon." In upcoming posts I hope to cover some mathematics behind volatility index, and how futures on DVOL can be priced. 

Read more details here. As I mentioned in previous posts - if you want to trade Bitcoin and Ether options there is no better, more liquid and more robust place than Deribit. With recent market run-up there are ample opportunities to capitalize on skew in cryptocurrency options.

Mar 29, 2021

The Early History of Volatility Indexes


CBOE - history of volatility
When CBOE started trading options in 1973, only calls on individual stock options were listed. Puts followed few months later, but it took until 1983 - another decade until index options were introduced. The leading index at that time was the S&P 100 index - partially because of limited computing power, and easier replication than the broader S&P 500, and S&P 100 options were the most popular index options. 

When the stock market crashed in October of 1987, Robert Whaley was low level finance teacher at Duke and moonlighting as consultant in finance-related lawsuits, including one for CBOE. The exchange was being sued for mishandling operations during the crash and letting options trade at unreasonable prices, and during one of the discussions he proposed that “... it would really be interesting to have an index on volatility.” A volatility index was proposed earlier in an academic paper by Menachem Brenner and Dan Galai, but it was more of a theoretical idea - they wrote that a volatility index can be based either on realized volatility, or implied, and provided no practical details. It fell of Whaley to solve all the issues with implementing a practical and useful volatility index.

In 1992 Whaley spent 4 months on a mini-sabbatical in France with a pile of a hard-drives with options data from CBOE working on volatility index. He writes:

The trouble you have by focusing in on the implied volatility of a single option is that its maturity changes every day. And its relationship with the underlying index level changes every day as it moves around the exercise price of the option. So the key ingredients to developing a sensible index would be to somehow hold the moneyness constant—make it an at-the-money option by interpolating around the index level. And by using options with different maturities, interpolate to get a constant 30 days to maturity.
In January of 1993 CBOE introduced VIX - a volatility index on S&P 100, and started disseminating it in real-time. As the concept of implied volatility, or expected variance is too much for talking-heads VIX caught on the moniker "the fear index"; the values of the index became some sort of a sentiment measure, an indicator how nervous investors are about stock decline. This turns out to be quite correct - while stock implied volatility is an unbiased predictor of future realized volatility, index volatility typically runs at a premium, mostly driven by put buying. 

In the following decade options trading has expanded tremendously, and index options became a major revenue source for CBOE. In 2003 they started thinking about launching VIX derivatives, and revamped VIX index using "model free" methodology: instead of using the Black-Scholes formula, the new VIX was calculated as square root of weighted sum of all options. I have blogged about this change, and intuitive meaning behind it.  The underlying options complex for the new VIX was changed to now more liquid S&P 500 options, and the old index was renamed VXO.

Now Whaley is highly acclaimed for his contributions to volatility, and works as a professor at Vanderbilt. 

I follow that number each and every day. I mean, it’s as meaningful to me as looking at the level of the dollar or the SPX, because it’s telling me how anxious people are about the next 30 days.
In the following posts I will write about volatility indexes on different asset classes, including recently introduced cryptocurrency implied volatility indexes. If you are interested in trading cryptocurrency derivatives I recommend Deribit- the most liquid crypto derivatives exchange operated by veteran options traders. They take all security and operational risks quite seriously and the platform is exceptionally robust.

Aug 4, 2020

The Blatant Con...

This is not an original research - something forwarded by a friend, but I believe this need to be disseminated

Last Tuesday afternoon, the White House announced that Kodak – a public company with less than $100 million in market cap (which basically means they're essentially a pension fund with a famous brand name attached) – would receive $765 million in “loans” from the US government to create a “pharmaceutical start-up” that over a period of 8 YEARS will start making pharmaceutical “supplies: (Whatever the fuck that means)

This $765 million in non-recourse, non-securitized loans for pharmaceutical supply production, given to this micro-cap company with zero experience / expertise in pharmaceutical supply production, comes from the International Development Finance Corporation (DFC), a $60 billion piggy bank that is one of many White House conduits for crony capitalism, established by the Trump administration in 2018 to replace the Overseas Private Investment Corporation (OPIC).  Emphasis on "international development" & "overseas" 🤔

On the corporate side of the con, we have Kodak Chairman and CEO Jim Continenza, who picked up 3 million shares and cheap options over the past 4-6 months. It’s Kodak board member George Karfunkel of the private equity and banking Zyskind-Karfunkel family, with his 6.4 million shares. It’s Kodak board member Philippe Katz, who owns about 4.3 million shares through at least five shell companies.  Of these shares, they were also each granted tens of thousands of shares in Kodak just over the past 60 days. In addition, Kodak granted Jim options for $1.75MM shares on Monday, the day before the announcement (and stock tripling)!!  BRAZEN & BLATANT!  Then again, when you have AG Barr to do your bidding, you're ensured any SEC investigation will be quashed quietly on the back-end (if it even occurs at all).  Jim also happens to be CEO of Vivial, a digital marketing company, which is Jim’s particular forte.  Yup he's a marketing guy...i.e. he peddles bullshit.  No background in manufacturing.  No background in biopharma. 

Based on Thursday's closing price for Kodak stock, they made about $400 million over the 48 hours post-announcement.  Let's also acknowledge the small-fry Kodak grifters who covered their tracks & tipped their buddies about the deal, sparking 1.65 million Kodak shares trading for $2+ on Monday, about 25 times the average trading volume of the prior weekin advance of the Tuesday announcement.

On the government side of the grift, it’s Donald Trump, who gets a press conference, a talking point and assuredly a kickback when he exits the presidency.  Kodak (or some private LLC of which Jim, George & Phillipe are managing members) will surely pay Trump his 20-30% cut (on the entirety of gains of course - the capital gains as well as the $765MM recourse-free "loan") in the form of a massive "consulting fee", or donate to one of his "charities" or shell corps, from which the money can of course be easily siphoned as needed).  It’s Commerce Secretary Wilbur Ross and Secretary of State Mike Pompeo, who of course "just happen" to sit on the DFC board of directors, each pocketing a favor as well as a kickback as aforementioned.  It’s Larry Kudlow, the nation's top economic adviser, who also "just happens" to be a University of Rochester alum and friend of Kodak (but of course), who pockets a BIG favor & his cut.  And where is Eastman Kodak headquartered you ask?  You guessed it - Rochester!

And it's Adam Boehler, the 41 year-old head of the DFC (he's just a figurehead of course - he does the bidding of the Board of Directors & is there to create the optics of independent governance), who will get a cushy CEO gig somewhere in the private sector once he exits government "service" 😂. So how does the head of what's essentially a government slush fund “learn” (and I quote) that a failed company with ZERO experience in pharmaceuticals “was interested in creating a start-up that could supply ingredients for pharmaceuticals”, and so – within a matter of days – advances a proposal to give that failed company $765MM American dollars...US taxpayer money...YOUR tax $$ (and mine)?  Did someone email him at info@dfc.gov lol?!!  I'm guessing he "learned" about Kodak’s "pharmaceutical start-up plans" (oh the bullshit is strong in this con) from Uncle Wilbur or Uncle Larry after they had a really interesting conversation with their good friends in Rochester.

I wonder - what evidence was proffered to Adam and the DFC board showing Kodak’s pharmaceutical start-up expertise?  Looking at Kodak’s 10-K and 10-Q, they talk about the business lines that Kodak has – Traditional Printing, Digital Printing, Advanced Film Materials & Chemicals, and a fourth category they just call “Brand” – I’m wondering where pharmaceuticals fits into this picture?!  Looking at management discussion of new business & licensing opportunities, which took place at the annual shareholders meeting on May 27th – just 8 weeks ago!! – where they talk about opportunities in “3D printing, smart material applications and printed electronics”, I can’t find a single mention of anything related to "pharmaceuticals".

Financial diabolical genius no doubt.  Surely this is the first time Jim & the Kodak gang tried implementing a scheme like this.  I say Nooooo!  Waaay back in the stone ages that was 2018, Kodak decided to reinvent itself as a crypto play, complete with a failed ICO and a Bitcoin-mining machine to boot (I shit you not - it was called the Kodak KashMiner). What did Kodak stock do?  It tripled in a week before subsequently reverting back in the weeks thereafter.  So of course Jim et. al decided it was time for another pump-and-dump scheme.

Straight theft - it's wealth redistribution from taxpayers directly into the pockets of these cockroaches.  Kodak profits by getting $765MM for free, management makes hundreds of millions in the market off this pump-and-dump scheme, AND they get to generate profits from selling whatever they manufacture (almost surely back to the taxpayers, which will pay a huge markup to ensure Kodak generates tons of profits), which then means the execs get an even larger payout for years to come!

Ladies & gentlemen, you just got jacked.