VIX - what beast is this, and how to find it in crypto? - YieldFort

VIX – what beast is this, and how to find it in crypto?

VIX – what beast is this, and how to find it in crypto?

🔔VIX – what beast is this, and how to find it in crypto?🔔

Many of you might have encountered the term “VIX” while reading the press. Journalists often describe it as the “fear index,” and some even call it volatility. So, what is VIX?

😎Let’s quickly remind ourselves about volatility and implied volatility. Volatility is a measure that reflects the degree of price variability of a financial instrument over a certain period. And what about implied volatility? It’s future-oriented and reflects market expectations regarding the degree of price change of an asset in the upcoming period.

VIX expresses the market’s expectations regarding the volatility of a financial instrument’s prices over the next 30 days.

🏭The VIX calculation methodology is based on the S&P 500 index (SPX) options prices. It includes selecting put and call options with close expiration dates to estimate their volatility. Then, VIX is calculated as the square root of the annualized variance (or standard deviation) expected by the market.

👩🏻‍🎓If VIX is below 15, it generally indicates a favorable market environment, and participants don’t foresee anything wrong happening. However, “bad” means that market participants do not anticipate an event that would significantly move prices in one direction or another. Since the SPX index is considered, it’s rare to see an event where the SPX index, for example, moves by 10% in a trading session (hello, Bitcoin). Therefore, typically, with a low VIX, the market grows slowly, and a sharp spike in VIX occurs during a decline (as it can fall more sharply).

🪙As for crypto, one can look at Volmex or DVOL from Deribit. Their indexes are logically identical to the VIX approach and reflect expectations of changes in implied volatility. They are expressed in % so for correct interpretation of how much volatility can change, for example, DVOL from Deribit needs to be divided by 19.1.

VIX calculation methodology

DVOL Deribit