After a few weeks from the market crash, we can use this opportunity to learn something from it and apply the concept we learnt on the OP.
All the graphs and analysis are from skew.com, in case you are interested reproducing them for your own personal analysis.
Les'ts start from the price action:
On March 12th BTC USD Fell from 8,000 to 4,800 a fall of 40% in a few hours.
There were a few reasons why this happened, but I don't want to discuss those here, I want to analyse how that move impacted the options market.
First of all let's see at the historical volatility: how such a dramatic move impacted the realised volatility of BTCUSD?
Of course volatility increased.
Remember that "historical" or "realised "volatility" is the volatility observed on the market, computed using real data. It is something relating to PAST events. A market crash starts influencing Historical volatility after it happened.
Particularly the impact was greater if we considered shot computation window: of course considering 1 month historical volatility this "jump" had a bigger impact rather than calculating the same measure over a 3 months windows, where the effect was barely noticeable. So, when we say that "Bitcoin volatility increased, we have to add a little bit of details to this statement.
For example we notice that, being almost a full month passed since the event, the 1m volatility has returned almost to his pre-crash level, while the other volatilities remain still more elevated.
Ok, what happened to the implied volatility?
Implied volatility is something that is not so easily computale quantity. You cannot (in almost every financial market) directly observe it, as you can only observe option prices. As we have seen, all other data being known, observing the option prices allows you to compute the implied volatility, inverting the pricing model.
Implied volatility is the volatility used to price the options, so it is the volatility used to price FUTURE events.
So how implied volatility reacted to market crash?
We see that before the crash the implied were "low" and when the crash happened they skyrocketed, almost doubling their value.
Market participants were caught off-guard from this movement and had to quickly readjust their prices.
Of course again, the options with shorter life span were the one who were impacted the most, as that "jump" highly impacted their their moneyness (and hence payoff) via the high gamma. Longer expiry options were also impacted, but you see the green line of options expiring in 6 months was less impacted. Market participants believe that volatility will stay somewhat elevated in the coming months, so we haven't see a complete retracement of volatility value.
So how do they compare putting together?
Looking at a graph comparing te two kind of volatilites:
Of course we a re comparing homogeneous volatilities , computed on the same horizon: historical computed the three past moths, while the implied takes in consideration the future three months.
We see that prior to the crash both the implied and historical volatilities were "lows". In particular implied volatility was trading at premium on historical volatility. An option buyer would have lost, hedging their position because the paid volatility would have been on average higher that the hedging volatility. So why did he paid such a premium? because he bet on the "future" volatility. where he would have actually had the opportunity to hedge.
When the market crash happened both volatilities skyrocketed, but now the situation is the opposite: the implied volatility is decreasing, while the historical is staying almost unchanged. This means that the observed shock is not priced to happen again in the future next three months. OF course the "risk" in the market is somewhat still elevated, and hence implieds are not yet returned to their previous state.
The last graph represent how the skew changed, or how are nod differently quoted puts vs calls: skew here is measured on volatility difference between the 25% delta put and the 25% delta calls.
We see this almost unchanged. I would have rather expected a widening in quotation, given the surge in absolute volatility level. Rather this is quite stable, meaning the investors haven't dramatically changed their appetite for one side or the other.
Another example of this is the Call/Put ratio, or the ratio between the two:
We see it quite erratic, but overall stable over the last weeks: sign that there aren't imbalances on the market participant's positioning. Only recently the call open interest has been surging again versus puts (it is indeed stable regarding the trading volume). This is a sign that option players are buying more calls than puts.
This also help us to demystify a view where derivatives are source of the movement. If we give a look at the combined graphs of volumes and open interest:
We see that volumes start growing AFTER the move, and the open interest at the same time actually shrink. This means that over the crash there was a closure of position, rather than a new position opening. Given the Call/Put ratio in addition one might suspects that during the crash many open long position had to be liquidated. This is consistent with reports of high volumes, shrinking open position and falling call/put ratio.
Again DYOR while looking at those graphs, as looking at option only can be really misleading on market positioning of various players, as we totally overlook the total positioning : if we see a surge on put buying it's not necessarily tied on people betting on a market crash, but it might be longs trying to safeguard at least part of their position in case of a sudden downturn (like ray
Dalio did with the infamous 100 Billion put on the S&P; he still was long the market!)
