Volatility is a term that many traders and investors use, but what exactly does it mean? Volatility can have some pretty interesting effects on market prices. However, it turns out most people don’t know how this works, according to Binance founder Changpeng Zhao.
CZ’s recent comments on volatility received harsh criticism. In May, CZ’s incorrect claim on volatility being “not unique to crypto,” faced many sources. Cointelegram pointed out that only Tesla matched Bitcoin’s volatility.
What is Volatility?
Many people may not know what volatility is or that it’s essential to look into when trading. Volatility refers to how sizable daily price fluctuations are. And, higher levels state there could be more risk in your investments.
It sounds counterintuitive, but lower volatility days draw a more vital risk of hot moves. That’s because, during quieter times, traders tend to over-leverage. Then get large liquidations when prices suddenly move up or down in response.
The data shows that the average volatility over 50 days has been 74%, with no guarantee of an increase to 80%. However, between February and April 2017, there are two episodes where this indicator moves up.
Volatility does not differentiate bull and bear markets. It is an indicator that gauges absolute daily oscillations. Furthermore, by itself, a quiet period of volatility is not a sign that something terrible might happen.
What if CZ knows something we don’t?
It is hard to predict the future, but CZ connections might give him some inside news on likely events. It does seem unlikely, though. If CZ were sure about an upcoming event, he would have pointed towards the direction of the volatility. He played neutral in his prediction.
Let’s assume that he was correct, and crypto volatility is about to breach the 100% yearly level. There’s a strategy that fits this scenario. Also, it allows investors to profit from a strong move in either direction.
The reverse iron butterfly is a limited risk, limited profit options trading strategy. It’s important to remember that options have a set expiry date. Therefore, the price increase must happen during the defined period.
Source: Deribit Position Builder
The prices above were taken on Oct. 25, with Bitcoin trading near $63,000. All options listed are for the Dec. 31 expiry, but you can use this strategy in a different time frame.
The suggested bullish strategy consists of selling 1.23 BTC contracts of the $52,000 put options. While concurrently buying 0.92 call options with an 80K strike price each to finish your trade-in. In this case, you are looking for a boost from rising costs, which will help keep things moving up.
A call option gives the buyer the right to buy an asset at a specific price before it expires. Besides, the contract seller gets potential harmful exposure in case there is financial loss. And they need protection by depositing 0.174 BTC (roughly $11,000).
The risk to reward is sketchy, so the trader needs conviction
A savvy investor should consider the risks of investing in Bitcoin. If you buy at $54,400 on Dec. 31, 2021 (down 14%) or above 75K (up 19%), your potential loss is over three times that amount.
Speculators should know that volatility is right around the corner. And they are making it possible to make 20% profits solely through options trading. Traders can take advantage of this by selling their options before a strong price move. Then later, repurchase them once they’ve profited from higher prices.