Module 8: Crypto Options
Implied Volatility
Chapter 6 of 14 · about 5 minutes
6.1 Right direction, barely profitable
Before a major announcement, Mint bought a one-week at-the-money BTC call for $3,866, expecting a big rally. The announcement came, and bitcoin rose 3%, just as Mint had hoped.
Mint checked the option. It was worth $4,136, a gain of only $270.
"I was right!" said Mint. "Why did I barely make anything?"
"Because the market had already priced in a big move," said Hash. "Before the announcement, options were expensive because everyone expected fireworks. After it, that expectation disappeared, and option prices collapsed. You were right about direction but paid too much for volatility. That's called volatility crush."
6.2 Two kinds of volatility
Realised volatility (also called historical volatility) measures how much the price actually moved over a past period.
Implied volatility (IV) is the volatility that's implied by current option prices. It's the market's expectation of future volatility, worked backwards from what people are paying for options.
| Realised volatility | Implied volatility | |
|---|---|---|
| Looks | Backward | Forward |
| Comes from | Past price movements | Current option prices |
| Tells you | How much the price has moved | How much the market expects it to move |
Remember from Chapter 5 that option prices depend on five inputs. Four are known: price, strike, time, and rates. Volatility isn't. So traders take the market price of an option and solve the pricing model backwards to find the volatility that would produce that price. That's implied volatility.
In practice, options traders often quote and compare options by their IV rather than their dollar price. Saying "this option is trading at 55 vol" is like saying what the market thinks the asset's annual volatility will be.
6.3 What an IV number means
IV is quoted as an annualised percentage. It can be converted into an expected move over any period:
Expected move ≈ price × IV × √(days ÷ 365)
| Value | |
|---|---|
| BTC price | $100,000 |
| 30-day IV | 55% |
| Expected 30-day move | $100,000 × 0.55 × √(30 ÷ 365) ≈ ±$15,800 |
| Expected daily move | 55% ÷ √365 ≈ ±2.9% |
Under the model's assumptions, there's roughly a two-in-three chance that BTC ends the 30 days within about ±$15,800 of today's price. That's a rough guide, not a promise: crypto has larger jumps than the model assumes.
6.4 Crypto IV compared with other assets
| Asset class | Typical implied volatility range (illustrative) |
|---|---|
| Major stock indices | ~10% to 25% |
| Individual large stocks | ~20% to 40% |
| Gold | ~10% to 20% |
| Bitcoin | ~35% to 80%, higher in crises |
| Ether | Usually higher than Bitcoin |
| Smaller tokens | Often much higher |
Crypto's high IV is why its options are expensive compared with those on traditional assets.
6.5 Volatility indices
Some data providers publish volatility indices for BTC and ETH, which summarise 30-day implied volatility across many options into one number, similar to the VIX index for the US stock market. They're useful for tracking how expensive options are and how nervous the market is.
6.6 Volatility crush
Before scheduled events, such as major economic data, regulatory decisions, or network upgrades, implied volatility often rises, because traders buy options to bet on or protect against big moves. After the event, uncertainty disappears, and IV usually falls sharply. This is volatility crush, or IV crush.
Here's Mint's trade:
| Before the event | After: BTC up 3% | After: BTC flat | |
|---|---|---|---|
| BTC price | $100,000 | $103,000 | $100,000 |
| Days to expiry | 7 | 6 | 6 |
| Implied volatility | 70% | 45% | 45% |
| $100,000 call value | ~$3,866 | ~$4,136 | ~$2,301 |
| Mint's result | +$270 (+7%) | −$1,565 (−40%) |
Before the event, the 70% IV implied a one-week move of about ±$9,700. Bitcoin only moved $3,000. The move was smaller than the market had priced in, so even though Mint was right about direction, most of the expected value disappeared with the IV.
"So I need to be right about direction and the move has to be bigger than what the market already expected," said Mint.
"When you buy options before events, yes," said Hash. "That's the hidden hurdle."
6.7 The volatility risk premium
Over long periods, implied volatility has tended to be higher than the volatility that actually follows, in crypto and in traditional markets. This difference is called the volatility risk premium. It exists because many people are willing to overpay for protection, just as insurance premiums are usually higher than expected payouts.
This is the main reason option sellers can earn returns over time (Chapter 12). But the premium is a reward for taking risk. In crashes, realised volatility can massively exceed implied volatility, and sellers can lose years of premiums in days.
6.8 Is IV high or low?
To judge whether options are cheap or expensive, traders compare IV with:
| Comparison | Question it answers |
|---|---|
| Recent realised volatility | Is the market expecting more or less movement than has been happening? |
| IV's own history | Is IV high or low compared with the past year? |
| Upcoming events | Is high IV justified by a known event? |
| Other expiries | How does short-term IV compare with longer-term IV? (Chapter 9) |
Some traders use IV rank or IV percentile: where today's IV sits within its range over the past year. A high IV rank suggests options are expensive relative to recent history, which may favour selling. A low rank suggests they're cheap, which may favour buying. Neither is a guarantee.
6.9 Try it yourself
Find the current 30-day implied volatility for BTC, from a volatility index or an at-the-money option on an options chain. Use the formula in section 6.3 to calculate the expected 30-day and daily moves. Then find BTC's realised volatility over the past 30 days. Is the market expecting more or less movement than recently occurred?
Next, find a scheduled event in the next month and compare implied volatility for an expiry just before it with one just after.
Key takeaways from this chapter
- Realised volatility measures past movement; implied volatility is the market's expectation, derived from option prices.
- IV is annualised and can be converted into an expected move using the square root of time.
- Crypto IV is much higher than that of most traditional assets, making crypto options expensive.
- IV often rises before events and collapses afterwards, a pattern called volatility crush.
- Option buyers before events need moves larger than what's already priced in.
- Implied volatility has tended to exceed realised volatility over time, the volatility risk premium, which rewards sellers for taking crash risk.
- Judge IV against realised volatility, its own history, events, and other expiries.