Pairs traders looking for an edge might want to focus on a little-known indicator tied to bitcoin and the S&P 500.
That indicator is the spread between Volmex’s BVIV (the 30-day implied volatility index for BTC) and its S&P 500 counterpart, the VIX index. The spread has started to widen again, suggesting that BTC volatility is expected to outweigh stock market risk.
Implied volatility is influenced by the demand for options or hedging instruments.
“When the BVIV-VIX spread widens, it typically indicates that markets expect greater volatility in cryptocurrencies than stocks,” Volmex founder Cole Kennelly told CoinDesk. “Crypto options markets adjust more quickly to liquidity and macro catalysts, so implied volatility is often ahead of traditional markets.”
The spread recently broke a months-long range between 20,000 and 32,000 and broke the downtrend from the March 2024 high. These patterns suggest that BTC is likely to experience more volatility than the S&P 500 in the coming days.
Prospects of BTC volatility becoming relatively richer compared to the S&P 500 may lead pairs traders to consider opposite volatility bets on BTC and the S&P 500.
“When the BVIV-VIX spread widens significantly, some traders view it as a relative value setup: the implied volatility of cryptocurrencies has become cheaper or richer relative to equity volatility. This type of view is typically expressed through cross-asset multi-asset volatility trading rather than a simple directional position,” Kennelly explained.
Volatility trading, a capital-intensive strategy, involves betting on price swings rather than direction, typically through non-directional options or volatility futures.
Needless to say, these strategies are risky, like other plays, and require constant monitoring of positions and ample capital, making them suitable for institutions.
