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.

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