17 Jan 2022
BTC Options: Implied volatility in free-fall
The options market has seen sharply declining implied volatility in recent weeks. The short-term implied volatility is now at its lowest level since 2020.
Implied volatility (IV) is a metric derived from options illustrating the investor expectations of future price volatility over a given period. High implied volatility indicates that the market expects price volatility to be high onwards and vice versa.
However, implied volatility also illustrates the options premium. Declining implied volatility could be caused by lower demand for directional options bets in general.
Currently, the 1-month IV sits at 59% - the lowest since November 2020. Also, options with a longer duration have seen a substantial decline in their IV lately, with both the 3-month and 6-month IV sitting at levels around the late April lows.
We rarely see such low IVs in bitcoin, and these levels could be attractive for volatility bets - what’s called longing vega, i.e., buying call and put options.
While the IVs are at or even below 2021 lows, history has taught us that they can remain muted for a prolonged duration. From June 2020 until December 2020, the implied volatility fluctuated at or below the IVs seen today.
New DeFi innovations may contribute to lowering the implied volatility. Structural volatility sellers have emerged from DeFi Options Vaults. These vaults perpetually employ their allocated capital to sell covered calls and cash-secured puts.