How Does the Correlation between Crypto Assets Affect the DVOL Calculation?
DVOL is typically calculated for a single asset (like BTC or ETH). However, the high correlation between major crypto assets means that if the IV of one asset spikes, the IV of the other is likely to spike as well.
While DVOL's formula doesn't explicitly include correlation, the market's pricing of options is influenced by systemic risk, which is often tied to high correlation. A broad market panic (high correlation) will drive all DVOLs higher.
Glossar
Correlation between Crypto Assets
Interdependence ⎊ Correlation between crypto assets reflects the degree to which movements in one asset’s price statistically relate to movements in others, a crucial consideration for portfolio construction and risk management within digital asset markets.
DVOL
Volatility ⎊ Implied Volatility of Options (DVOL) within cryptocurrency markets represents a forward-looking expectation of price fluctuations derived from options pricing models, typically the Black-Scholes framework adapted for digital assets.
High Correlation
Risk ⎊ High correlation describes a strong statistical relationship where the price movements of two or more assets move in close alignment.