Implied volatility estimation of bitcoin options and the stylized facts of option pricing
Content
5 and 6 and Table 5 that the Newton Raphson method gives encouraging and better estimates of Bitcoin options implied volatility than the Bisection method for most of the trading days for the at-the-money and out-of-the-money options scenarios. However, we observe some deviations or jumps for the in-the-money options scenario. These deviations can be attributed to the choice of algorithm initialization technique.
Implied volatility estimation of bitcoin options
This study examined the stylized facts of options pricing for the still-developing Bitcoin options by considering the evolution of the volatility smile for 14-day maturity options at two different periods. The empirical results led us to believe that short-dated Bitcoin options tend to produce high volatility as they approach expiration. The practical implication of this phenomenon relates to crypto-options traders who demand more short-dated options, which result in increased buying pressure on the underlying (Bitcoin). This ultimately allows crypto-option traders to charge higher option premiums on Bitcoin call and put options. In analyzing the characteristics of the Bitcoin volatility smile, the presence of the volatility forward skew more closely resembles the skew found in traditional commodity markets than to equity indices or stock options. Based on the analysis and observations, one can conclude that Bitcoin belongs to the commodity class of assets.
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It is currently used for international remittance and has recently been accepted by some governments as legal tender. A good store of value should not have a very short lifespan, like flowers or milk. It should also be liquid, which measures how easy or difficult it is to exchange. With the approval of a Bitcoin ETF and other investment vehicles, Bitcoin is expected to transition to a more stable and accepted member of the financial community. With potential regulatory clarity and broader acceptance, Bitcoin stands on the brink of its coming-of-age story. Unlike traditional currencies, which central banks can issue indefinitely, Bitcoin has a maximum quantity that will ever exist, set at 21 million.
Bitcoin’s volatility has decreased due to its increasing acceptance in society and the financial industry, as well as increased user confidence due to Bitcoin’s history. The market capitalization of an asset also plays an important role in volatility in this regard. Volatility describes the magnitude of fluctuations in the value of an asset, such as stocks, bonds, or bitcoin, over a period of time. One of the main criticisms of the digital asset is the high volatility of its price.
Once gold became a recognized asset class and the market settled on a longer-term price range, volatility declined as well. However, when the price of gold rose and reasserted itself in 2007 through 2013 following the Great Financial Crisis, volatility increased once again as market participants experienced another period of price discovery. For example, over the last two years, bitcoin has been less volatile than Netflix (NFLX) stock. The realized volatility of NFLX on a 90-day timeframe averaged 53%, while bitcoin’s realized volatility over the same timeframe averaged 46%.
Last month, Federal Reserve Chair Jerome Powell hinted that there may be fewer interest rate cuts than originally expected, which could put downward pressure on riskier assets like Bitcoin. Inflation data, especially the Consumer Price Index (CPI), is central to market expectations. Thielen notes that a bitcoin era softer-than-expected inflation reading could spark a Bitcoin rally, aligning with 10x Research’s earlier forecast for a positive January. On the flip side, higher-than-expected inflation could put pressure on the market. Hot wallets are able to be connected to the web, while cold wallets are used for keeping large amounts of coins outside of the internet.
If accumulation continues and institutional buying confirms, bitcoin could trend upward with a potential target around $100,000, as some observers anticipate. Conversely, if the market fails to find sufficient momentum, a correction could be on the agenda. Therefore, the most suitable interpretation of the increasing implied volatilities is the demand for these particular strikes of Bitcoin options.
Visualizing Volatility Trends
Because of its well-known volatility, investors fear that they will miss out on big upswings or fall victim to large downswings. This causes many of them to panic sell or buy, influencing demand and, therefore, prices. Bitcoin, made publicly available in 2009, began its rise to popularity around 2010 when the price for one token rose from fractions of a dollar to $0.09. Since then, its price has increased by tens of thousands of dollars—sometimes rising or falling by thousands within one day. (3) and (4) to determine how the spillover effect from the stock market to Bitcoin differed in each period. (3), the Bitcoin variances are conditional on previous information (eBTCt-1, hBTCt-1) and the shock transmission from the stock market (eSPt-1, hSPt-1).
Range-based realized volatility has not experienced a proportionate reduction in extreme peaks over recent years, which is a notable trend. Range-based realized volatility was 1.74% higher than daily realized volatility, which is not entirely surprising given the calculation. Volatility begins to pick up and price accelerates as we enter a phase where volatility and the percentage of addresses in profit are both high. As price rises out of the bear market, there is a rise in addresses in profit as seller energy reaches its high. The number of days below an all-time high peaks just as volatility reaches its low, signaling a potential price bottom.