Realized vs Implied Volatility
Realized volatility calculations are based on historical data, providing the volatility that was experienced in an asset over a given timeframe. While realized estimates can be rough guidelines for expected future volatility, they are not nearly as thorough as implied volatility estimates. Implied volatility is the volatility that traders are pricing in for the future. Implied volatility will necessarily deviate from realized volatility as the market prices in different events. For example, if there is an expected ETF decision coming out, realized volatility would not capture the uncertainty of the event in the same way implied volatility does.
The LXVX is based on implied volatility, for the first time allowing participants insight into what US federally-regulated options are implying for bitcoin's future volatility.
The LXVX is based on LedgerX's US federally-regulated bitcoin options data. LedgerX options are USD-denominated and physically settle into bitcoin, providing a reliable estimate for expected USD/BTC price volatility. This is the only data of its kind in the world and LXVX has exclusive access to it.
In constructing the LXVX, LedgerX first constructs a volatility curve based on LedgerX listed bitcoin options. The vol curve is important to ensure consistency in pricing among strikes, making sure that no-arbitrage constraints are not violated prior to calculation of the LXVX.
At-the-money options have the most sensitivity to volatility. As bitcoin price moves, the strikes which were at-the-money will become less sensitive to volatility, and other strikes will be more important. As such, it's important to have a strike range that provides volatility exposure regardless of where spot moves. The LXVX accomplishes this by selecting strikes based on option delta, incorporating strikes from 25-delta (25% chance of ending in-the-money) to 75-delta (75% chance of ending in the money).
Bitcoin options provide forward estimates of volatility over various timeframes. The LXVX is designed to provide a 30-day estimate, thus the implied volatilities are time-weighted from the two expirations nearest to 30-days in order to produce the index value.