Bitcoin Volatility As An Asset Class
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Volatility as an asset class refers to isolating this variable and trading it as a standalone product. Usually volatility is isolated by the trading of delta hedged call and put options.
Currently Bitcoin does not have a liquid options market so this method of isolation does not exist. However this does not preclude the existence of tradable Bitcoin volatility. BitMEX is leading the market in innovations around the trading of volatility absent an options market. Trading volatility allows investors to profit from the price movements or lack thereof.
They need not predict the direction of the Bitcoin price. Event driven traders can profit from price gyrations after major news or market events which increase volatility. Conversely investors anticipating periods of relative inactively can sell volatility and profit from a quiet or sideways market. The futures contract allows investors to bet on where 30 day volatility will realise. The BVOL futures contracts expire on the previous 30 days realised volatility.
However, the contracts are tradable before the 30 day observation period starts. This allows investors to trade their expectation of where future historical volatility will realise. If it is 1 January and an investor is trading the BVOLG15 contract 27 February expirythe observation period does not begin until 29 January 30 days prior to expiry.
This has interesting implications for the pricing of other Bitcoin derivatives. Bitcoin by some is viewed as a long dated call option. The most crucial component to valuing an option is the volatility of the bitcoin implied volatility and options asset.
On a longer term view, higher the forward expectations of Bitcoin volatility lead to more valuable call options and possibly Bitcoin itself. If there are major market events that will occur at specific dates in the future, the forward bitcoin implied volatility and options of volatility gauge bitcoin implied volatility and options impactful the market believes these events to be. As liquidity and interest grows in the BVOL bitcoin implied volatility and options contracts, we will list longer dated maturities.
Once complete, investors will bitcoin implied volatility and options a term structure for expected future Bitcoin historic volatility. This is very useful for options traders pricing longer dated maturities. Using BVOL futures contracts as guide posts, options traders will be able to make markets in over the counter OTC options at tighter spreads and larger size.
Once the observation period has begun for a particular BVOL futures contract interesting arbitrage opportunities present themselves. Every day that passes there is more information about where the 30 day historical volatility will realise for a particular contract. BVOL prices too high or too low can be sold or bought vs.
Because both contracts have the same maturity, this difference represents a pseudo strangle. A strangle is an options strategy where one buys a put and a call with the put having a lower strike price than the call, and both options having the same maturity. This bitcoin implied volatility and options a volatility play; buyers of the strangle hope that realised is greater than implied volatility.
For sellers of pseudo volatility, if spot trades outside the profitable range, losses will accumulate in a non-linear fashion. In the absence of traditional options straddles and strangles, pseudo volatility is a way for traders to express their views on implied volatility for a particular maturity. The difference between same maturity pseudo implied volatility and realised volatility through BVOL presents trading opportunities.
The addition of volatility products on BitMEX has added three new trading strategies for investors.