• The Bitcoin Volatility Index (DVOL) is an index that measures bitcoin’s 30-day implied or expected volatility.
• The DVOL index has a positive correlation with the cryptocurrency’s price and this has made call options tied to bitcoin (BTC) more attractive than ever.
• The positive correlation between bitcoin’s market value and its implied volatility means faster price appreciation for call option holders.
Bitcoin Volatility Index
The Bitcoin Volatility Index (DVOL) is an index that measures bitcoin’s 30-day implied or expected volatility using Deribit’s options order book. This year, the DVOL has developed a positive correlation with the cryptocurrency’s price, making call options tied to Bitcoin (BTC) more attractive than ever.
The positive correlation between bitcoin’s market value and its implied volatility means faster price appreciation for call option holders. The 30-day correlation coefficient between bitcoin’s price and the DVOL index flipped positive in early January and rose to a high of 0.85 last week. At press time, the coefficient was 0.72.
Options are derivatives that give buyers the right but not obligation to buy/sell an asset at a predetermined strike price on or before a particular date in exchange for premium payments made upfront by buyers to sellers of those derivatives contracts. For example, when traders purchase call options on BTC, they are expecting BTC’s spot prices to increase over time – enabling them to realize greater profits from their investments due to leveraged positions created by exercising their rights under those contracts when spot prices move higher than pre-determined strike prices stipulated therein.
Options trading also offers investors an opportunity for risk management as traders can purchase put options on BTC which provide them with downside protection in case BTC’s spot prices decline below their pre-determined strike prices specified within their contracts – allowing them to manage losses associated with such unfavorable movements in spot prices against what would have been larger losses had they not opted for such insurance policies provided by these derivative instruments through smart hedging strategies adopted within their respective portfolios accordingly .