Volatility Indices

Volatility indices distill the vol surface into a single number, making it easy to track market-wide implied volatility over time.

Definition

A vol index is a calculated measure of implied volatility across the options market, typically representing 30-day expected volatility.

Key Points

• Vol indices track aggregate implied volatility, not any single option
• They're forward-looking (like IV), not backward-looking (like realized vol)
• Different indices use different methodologies, but aim for the same thing

Major Vol Indices

VIX (CBOE Volatility Index)

The most famous volatility index. Measures 30-day implied volatility of S&P 500 options.

Attribute	Detail
Underlying	S&P 500 (SPX)
Calculation	Weighted average of OTM option prices
Range	Typically 10-30, spikes to 80+ in crises
Live chart	TradingView VIX

Why it matters: The VIX is called the "fear gauge." When stocks sell off, VIX spikes. Major funds and institutions use VIX levels to make allocation decisions.

VIX Level

Market Interpretation

Historical Context

< 15

Calm, complacent

Bull markets, low fear

15-20

Normal

Average conditions

20-30

Elevated concern

Corrections, uncertainty

30-50

High fear

Bear markets, major events

> 50

Extreme panic

2008, 2020, rare events

DVOL (Deribit Volatility Index)

The VIX equivalent for Bitcoin. Published by Deribit, the dominant crypto options exchange.

Attribute	Detail
Underlying	Bitcoin (BTC)
Calculation	Similar methodology to VIX, adapted for crypto
Range	Typically 40-80, can exceed 150 in crises
Live chart	Deribit DVOL

Why it matters: DVOL is the benchmark for BTC implied volatility. When you hear "BTC vol is 55%," they're often quoting something close to DVOL.

DVOL Level

Market Interpretation

Historical Context

< 45

Low vol (for crypto)

Consolidation, range-bound

45-60

Normal

Typical BTC trading

60-80

Elevated

Trending markets, events

80-100

High fear/excitement

Major moves, liquidations

> 100

Extreme

March 2020, Luna, FTX

ETH DVOL

Same methodology as BTC DVOL, but for Ethereum.

Attribute	Detail
Underlying	Ethereum (ETH)
Range	Typically 50-90 (usually higher than BTC)
Live chart	Deribit ETH DVOL

ETH vol is typically 10-20% higher than BTC vol due to ETH's higher beta.

VolMex

An alternative crypto vol index protocol that creates tradeable vol tokens.

Attribute	Detail
Underlying	BTC and ETH
Unique feature	Creates ERC-20 tokens representing vol exposure
Link	VolMex

How Vol Indices Are Calculated

Vol indices like VIX and DVOL aggregate OTM option prices across the entire strike range. Try adjusting the vol level and skew to see how the index responds:

Vol Index Calculation

DVOL: 56.5%

Vol indices aggregate OTM option prices across strikes. Adjust the sliders to see how the overall vol level and skew affect the calculated index.

Vol Level: 55%

Low (30%)High (100%)

Put Skew: +5%

Flat (0)Steep (+15%)

Strike	10P	25P	ATM	25C	10C
K ($)	85k	93k	100k	107k	115k
IV (%)	60.0%	57.3%	55.0%	54.3%	53.5%
Price ($)	4387	5329	6307	5047	3912
Weight	138%	116%	100%	87%	76%

Contribution to Index

10P

25P

ATM

25C

10C

Key insight: OTM puts (with skew premium) contribute heavily to the index. When skew steepens, the vol index rises even if ATM vol stays flat.

The VIX (and DVOL) uses a model-free approach that doesn't rely on Black-Scholes:

VIX/DVOL Formula

σ² = (2/T) × Σ (ΔK/K²) × e^rT × Q(K)

Hover to explore:

Hover over a variable above to see its meaning.

Key Insight

This formula integrates OTM option values across all strikes. More expensive OTM options (both puts and calls) mean a higher vol index. Skew matters because OTM puts often carry premium.

The 30-day index interpolates between the two nearest expiries to get a constant 30-day measure.

Using Vol Indices

As a Market Indicator

Vol indices give you a quick read on market sentiment:

Signal	What to Watch	Interpretation
Spike	VIX > 25 or DVOL > 70	Fear entering, expect volatility
Crush	Vol index drops 20%+	Uncertainty resolved, calm returning
Divergence	Vol rising while spot flat	Market pricing a move that hasn't happened
Persistence	Vol stays elevated for weeks	Regime change, new normal

For Timing

Some traders use vol indices for timing:

• Buy when VIX > 30: Historically good entry points for equities
• Sell when VIX < 15: Market may be complacent
• Fade DVOL spikes > 100: Often mean-revert quickly

Vol Index Futures and Options

VIX has liquid futures and options markets, allowing direct vol trading. Crypto vol indices are less developed but growing.

VIX Term Structure

VIX itself has term structure! VIX futures for different expiries trade at different prices:

Term Structure	What It Means
Contango	VIX futures > spot VIX
Backwardation	VIX futures < spot VIX

Limitations

Vol indices are useful but have caveats:

Limitation	Detail
30-day only	Doesn't capture term structure nuances
ATM-weighted	Skew information somewhat compressed
Lagging	Updates with market prices, not predictive
Not tradeable directly	VIX spot isn't tradeable; futures have their own dynamics

Historical Context

Event	VIX Peak	DVOL Peak
2008 Financial Crisis	80+	N/A
March 2020 (COVID)	82	180+
Luna/UST Collapse (May 2022)	35	120+
FTX Collapse (Nov 2022)	30	100+

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Related:

• Vol Surface - What the indices summarize
• Vol Regimes - Market states defined by vol levels
• Reading Volatility Course - Full course on reading vol