A key difference has emerged this year. While the VIX continues to serve as Wall Street's fear gauge, rising during bouts of risk aversion, the DVOL has developed a positive correlation with the cryptocurrency's price. 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. That has made call options tied to bitcoin (BTC) more attractive than ever, according to observers.
"Since the start of 2023, bitcoin has displayed a strong spot/implied volatility regime of positive correlation. That has flipped 2022 on its head," Greg Magadini, director of derivatives at crypto data provider Amberdata, told CoinDesk. "It's been rewarding call buyers with directional spot gains and increasing volatility gains."
DVOL, introduced in early 2021, measures bitcoin's 30-day implied or expected volatility using Deribit's options order book. The VIX is based on the options prices of the S&P 500 stock index.
Options are derivative contracts that give the purchaser the right, but not the obligation, to buy or sell the underlying asset at a predetermined price on or before a specific date. A call option gives the right to buy, a signal the holder has a bullish stance, while a put option gives the right to sell. Options prices are determined by several factors, including market direction as well as implied volatility, which is influenced by the supply and demand for options.
DVOL's positive correlation with the cryptocurrency's price means call options stand to benefit from both favorable directional movement and an uptick in implied volatility. In other words, calls are likely to see faster price appreciation during bullish moves than puts during bearish moves.
"Assuming the spot/vol correlation persists, this raises the appeal of owning calls as a call buyer can hit a 'double whammy,' winning on both Delta [directional gains] and Vega [implied volatility gains] in a sharply rising market," Spencer Hallarn, an over-the-counter trader at crypto trading firm and liquidity provider GSR, told CoinDesk.
Caught off guard
The positive correlation is in stark contrast to last year, when bitcoin's turn lower after an 18-month bullish trend caught traders off guard, leading to panic buying of put options. At the time, DVOL spiked during notable price declines and puts saw faster price appreciation during bearish price action than calls during corrective rallies.
CBOE's VIX index rises during bearish market environments and falls or holds steady when the market rallies. That's because stock traders tend to be long-term bullish and are quick to snap up puts for protection on the first signs of weakness in the stock market. Demand for protection dissipates when the market rallies, leading to a decline in the VIX. The net effect is that puts see faster appreciation in value during market swoons than calls do during risk-on trends.
The fear of missing out, or FOMO, could soon kick in, driving stronger demand for options and pushing DVOL higher.
"The crypto market can sometimes spike up and everybody then wants to be fully in it (FOMO, especially since we came down from the $68K level)," Pierino Ursone, head of options at Deribit, said while explaining DVOL's positive correlation with the price. "When extra demand for out-of-the-money higher strike calls kicks in for crypto, one should beware it can be really strong and persevering."
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