Artur Sepp: Modeling Implied Volatility Surfaces of Crypto Options

Very very interesting lecture from Artur Sepp - if you are trading crypto options on Deribit or CME this is a must-watch. I will probably be providing more comment on the video from my perspective in another blog post.

Please help Ukraine

Please join non-military resistance against Russians and Russian businesses. It does not need to be a top-level decision: if you are doing support – de-prioritize support tickets, if you are processing payments – delay them by one day, if you are writing an email mention “Russian warship”

Right now Russians in RF are living as if nothing has happened, while Ukrainian civilians are being bombed, and while Russians in diaspora are posting #no war and broken heart emojis their silence and cowardice for years has enabled Putin

The war in Ukraine is not a meme, is not a trending hashtag, but a real country where civilians are dying. Please don’t “thoughts and prayers” but do something – and donate to Ukrainian resistance  https://bank.gov.ua/en/news/all/natsionalniy-bank-vidkriv-spetsrahunok-dlya-zboru-koshtiv-na-potrebi-armiyi

Re: Ukraine

 As I am sure all of you know Russia has began a full scale war against my home country Ukraine. Please make no mistake - Putin's goal in not to stop the expansion of NATO, not to install puppet government, and certainly not to bring peace. The goal is genocide of Ukrainian people. 

When Ukraine was under Russian communist occupation, Russians started off with killing of political leaders, repression of Ukrainian language and traditions - including prohibiting people from celebrating Christmas, and then wide-scale murder of millions of Ukrainian civilians.

We already starting to see this today: Russians say they are conducting surgical strikes, but there is already numerous witness accounts and video evidence of Russians targeting civilian hospitals, kindergartens, and bomb shelters.

Please: there is very little time - if you are reading this make a phone call to your government representatives and ask to sanction Russian federation in absolutely any way possible, and provide military aid, financial aid, and humanitarian aid to Ukraine, including establishing a no-fly zone over Ukraine. Please just do this little thing to give us a fighting chance.

For me, for my 16 year old sister, my teenage nephews, my cousins, my aunts and uncles - we are in grave danger - please call on your governments to act quickly and decisively. 

 

I Am Not Buying Until Elon Is Crying

What I see in the market right now is deleveraging and and taking the risk off pretty much across the board. However at these levels the new market entrants ( and new whales like Microstrategy and Musk ) who bought in the mid-30s are getting nervous and uncomfortable, but still have not capitulated. But if markets head lower from here, we will see a real capitulations and BTC will likely head to below 20. That will be a good dip to buy! 

So, to summarize, this is not a fundamental analysis, this is not technical analysis, this is my speculation on peoples emotions - right now is not the dip to buy, it is too early. Wait until the whales start puking and buy at 20 !

BTC Funding Rate Turns Sharply Negative

As of this morning following the market selloff BTC-perpetual funding rate, aka basis, turned sharpy negative after trading in green for the last 1/2 year. From the chart below it looks like breaking 44K level triggered the decline, and this can signify a major shift in investor sentiment. This can also possibly be an end to both general crypto bull market, and also dampen DeFi projects since their performance correlates to volatility and funding rates. 

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.

DVOL – Deribit Implied 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.