Volatility is a complex statistical measure commonly used by traders and investors. Those unfamiliar with it will likely attribute some special kind of “representation” to analysts whenever the term is used. However, as a recent comment from Binance exchange founder Changpeng Zhao shows, most of the time people have no idea what volatility means.
Expect very high volatility #crypto over the next few months.
– CZ Binance (@cz_binance) 21 October 2021
This is not the first time that CZ has made an incorrect assumption on this subject. In May, CZ said volatility was “not unique to crypto,” although several sources, including TBEN, showed that with the exception of Tesla, no stock in the S&P 500 matched annual volatility. of 70% of Bitcoin (BTC).
So what is volatility?
Realized (or historical) volatility measures the magnitude of daily price fluctuations, and higher volatility indicates that the price can change dramatically over time in either direction.
This indicator may seem counterintuitive, but periods of lower volatility represent a greater risk of explosive movements. This is in part because realized volatility is a retrospective indicator. During quieter times, traders tend to over-leveraged, which then causes larger sell-offs during sudden price movements.
The data above shows an average volatility of 74% over 50 days over the past two years. Historically, the indicator tends to accelerate when it goes above 80%, but there is no guarantee that such a move will occur. The data from February and April 2017 present a counter-argument for this thesis.
Volatility does not differentiate bullish and bearish markets as it exclusively assesses absolute daily swings. Moreover, in and of itself, a period of calm volatility is not an indicator of an upcoming dump.
What if CZ knew something we don’t know?
Considering how well connected the world’s largest crypto exchange founder is, it’s still possible that CZ might have inside information, but if a person were so sure of an upcoming event, there’s a good chance that she knows whether the impact is positive or negative. . Again, expecting “high volatility” for the “next two months” does not indicate that anyone is confident in any direction.
Suppose he was right and the crypto volatility is about to exceed the annual level of 100%. There is an options strategy that fits this scenario and allows investors to profit from a large move in either direction.
The Reverse (Short) Iron Butterfly is a limited risk, limited profit options trading strategy. It is important to remember that options have a fixed expiration date; therefore, the price increase must occur during the defined period.
The above prices were taken on October 25, with Bitcoin trading close to $ 63,000. All of the options listed are for the December 31 expiration, but this strategy can also be used using a different time frame.
The suggested bullish strategy is to sell 1.23 BTC contracts on the $ 52,000 put options while simultaneously selling the 0.92 call options with a strike price of $ 80,000. To complete the transaction, it is necessary to buy 1.15 call options contract of $ 64,000 and 1 other put options contract of $ 64,000.
While this call option gives the buyer the right to acquire an asset, the seller of the contract obtains negative (potential) exposure. To fully protect yourself from market swings, you need to deposit 0.174 BTC (around $ 11,000), which is the maximum investor loss.
The risk of rewarding is summary, so the trader needs conviction
For this investor to benefit, the price of Bitcoin must be below $ 54,400 on December 31, 2021 (down 14%) or above $ 75,500 (up 19%). The theoretical risk-return is not good as the maximum payout is 0.056 BTC and the potential loss is more than 3 times that amount.
Nonetheless, if a trader is certain that volatility is near, a 20% move of $ 63,000 in 66 days seems possible. Traders should note that the investor can cancel the trade before the options expire, preferably right after a large change in the price of Bitcoin. You just have to buy back the 2 options that were sold, and sell the other 2 that were bought previously.
The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of TBEN. Every investment and trade move involves risk. You should do your own research before making a decision.