BTC Implied Volatility at Historical Low – Time to Buy BTC Options?

.This article is a follow up from Flood‘s great article about our options platform. Flood’s article explained the basic features of BTC options and discussed the effect of implied volatility (IV) on option pricing.

First Implied Volatility Analysis for BTC

Deribit hosts the only liquid crypto options exchange globally and this generates a lot of unique data. This data allowed Flood to present history’s first implied volatility graph for Bitcoin. We updated this graph with some recent data below.

48-hour rolling implied volatility of most liquid deribit options vs bitcoin price

The BTC implied volatility is the expected future volatility of the BTC price that is implied by option prices (premiums) on the Deribit exchange. All other things equal; higher option premiums imply higher implied volatility. For the statistically minded: the implied volatility is the expected annual standard deviation of the BTC price in percentage points.

For the graph we selected the most liquid call and put for every maturity date outstanding and calculated the 48 hour average implied volatility based on all trades in those options. It shows that volatility was highly variable up to December 2017 as the market was still relatively illiquid. Then, in December 2017, IV went up together with the BTC price.

In the equity market, rising stock prices lead to lower implied volatility, as optimism reduces the equity market’s expectation of risk and hence price variation. When equity markets go down, implied equity market volatility tends to go up.

The BTC market shows the opposite pattern. When the Bitcoin price exploded in December, implied volatility went up significantly as traders took the possibility of further price leaps into account. This was a great period to sell volatility (write options and collect the premium).

When the market went down implied volatility came down, especially after March when the options market started to perceive a range bound trading pattern  as more likely. Earlier this June, BTC implied volatility reached a historical low. After the BTC drop last week it went up by a few points but IV has since receded again.

BTC Option Strategy

This low IV might make it attractive to buy options. Call options might be especially interesting (if you’re bullish) because Bitcoin’s implied volatility tends to go up when the price of BTC rises. This would result in a more expensive option and might generate a double boost to a call option price if BTC goes up. Short dated options might be especially interesting if you believe the market is likely to jump up and down in the short term even if it might be range bound in the medium term.

Let’s look at a concrete example: Today the 20th of June at about 3pm CET you can buy a strike 6000, 27th of July ’18 Call option on one Bitcoin for about USD 880.

Options chain

With this option you receive any positive difference between BTC price and 6000 on the expiration date, the 27th of July. This means you will make money if BTC is higher than 6880 in 37 days. You can not lose more than USD 880 however and this effectively protects you against BTC dropping below 6000. The current BTC price is 6626 so by sacrificing USD 254 (USD 6880 – USD 6626), or 3.8% of a Bitcoin, you are effectively protected from BTC dropping under the 6000 level.

Profit and loss - 6000 call option june (on 27 july 2018)

Plans for the Deribit BTC Options Platform

We intend to start talking about our options platform and options strategies a lot over the next few months. We will also introduce many new products going forward. We recently introduced long dated December options. We will soon be introducing options (and futures) on different crypto’s like ETH and BCH.

We are also working on a more formal implied volatility index which is calculated in a similar way as the VIX, the implied volatility index of the S&P 500. This will be a great information source on expected BTC movements. It might even be a good reference asset for an implied volatility futures contract, like the extremely popular VIX futures.

Have a look out our cheat sheet to find out more about options trading.

Don’t hesitate to ask questions in our Telegram group if you want to discuss any topic related to options theory and strategy. We are there to help you out.