Deribit’s Bitcoin Volatility Index Signals Price Turbulence, Hits 16-Month High

• Deribit DVOL index, a measure of expected price volatility over the next 30 days, has surged to an annualized 76%, the highest since November 2022.

• The surging volatility has some traders “overwriting calls” to generate additional income.

• Deribit registers decent trading activity in bitcoin calls at strikes as high as $200,000.

Crypto exchange Deribit’s bitcoin volatility index, DVOL, a measure of how much market participants believe prices will move over the next 30 days, has surged. The jump is good news for bitcoin (BTC) holders looking to generate additional income from the options market.

The 30-day implied volatility index has risen from an annualized 41% to 76% in one month, reaching the highest since November 2022, per charting platform TradingView.

A rise in implied volatility positively impacts the prices of options or derivative contracts that give the purchaser the right to buy or sell the underlying asset later. A call gives the right to buy, while a put confers the right to sell.

The greater the volatility, the higher the option premium. Thus, elevated implied volatility often has savvy investors “overwrite” or sell call options to generate additional income on top of their spot market holdings. It is one of the most popular strategies in the stock market. The calls are usually sold at levels higher than the underlying asset’s going market rate.

The money received as compensation for selling a call or insurance against price rallies is retained if the underlying asset never rises above the strike level at which the call has been sold. The premium represents the additional yield on top of the spot market investment. If the underlying asset’s price exceeds the strike price, the investor must sell the stock while still pocketing the premium received for selling the call. (Traders with no spot market holdings can sell calls, too, but that’s a risky strategy with limited gain and scope for a considerable loss.)

The latest surge in the DVOL seems to have revived interest in overwriting calls.

Earlier on Tuesday, someone sold 250 contracts of $75,000 call options expiring in December, according to Deribit’s Asia business development personnel Lin Chen. The seller received a premium of $4.258 million. On Deribit, one options contract represents 1 BTC.

“The seller probably has a large stock of BTC in hand and can directly lock in the profit from the selling price of $75,000,” Chen explained.

Overall activity on Deribit, which accounts for 85% of the global crypto options market, has picked up, with bitcoin surging 58% this year to trade within striking distance from its record highs near $69,000.

The combined notional open interest in crypto futures and options segments has surged to a record high of $32 billion, according to data tracked by Laevitas. The options segment accounts for nearly $30 billion of the total tally.

Recently, the exchange has seen decent trading activity in calls at strikes as high as $200,000. Some experts foresee bitcoin’s ongoing bullish trend to peak at around $200,000 by September 2024.

“High strikes are being requested for longer expiries but even for March. There is decent trading in the $200,000 calls in June, Sep and Dec expiries,” Luuk Strijers, chief commercial officer at Deribit, told CoinDesk.

“The ETF-triggered hype is no longer just about BTC passing $100,000, but now even $200,000,” Strijers said.