A lesser-known use for options trading is simply to bet on whether price swings, or volatility, will increase or decrease.
When implied volatility is trading below historical volatility, it’s a sign that the market is underpricing prospects for future price turbulence relative to recent price turbulence.
It is analogous to buying an asset in the spot market when it is perceived as undervalued and selling when it appears to be overvalued.
Options are hedging instruments that give the purchaser the right but not the obligation to buy the underlying asset at a predetermined price on or before a specific date.
Bitcoin’s 10-day implied volatility has been trading well below the 10-day historical volatility for close to two weeks; the gap, however, has narrowed somewhat in the past few days.
A long strangle involves buying a call and put with the same expiry at strikes equidistant from the spot price.
Risk is predefined with these strategies, with the maximum loss limited to the extent of premium paid while purchasing calls and puts.
That said, returns can be sizable, as theoretically the underlying asset can rise to infinity, boosting implied volatility to the moon and generating a colossal profit on the long call position of the strategy.
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