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The CEO of Binance anticipates ‘extremely high volatility‘ in cryptocurrency
Here's how options traders would trade the "extreme volatility" predicted by Binance founder Changpeng Zhao for the cryptocurrency market over the next "few months."
Volatility is a complicated statistical measure that traders and investors frequently employ. When the term is used, those unfamiliar with it will almost certainly attribute analysts with some sort of special standing. However, as demonstrated by a recent comment by Changpeng Zhao, founder of the Binance exchange, the majority of the time, people are unaware of what volatility means.
This is not the first time CZ has erroneously assumed something about that subject. In May, CZ stated that volatility was "not unique to crypto," despite the fact that multiple sources, including Cointelegraph, indicated that no S&P 500 stock, with the exception of Tesla, had a yearly volatility of more than 70%.
What is volatility, then?
Volatility is a measure of how large daily price fluctuations are, and a higher level of volatility indicates that the price can change dramatically in either direction over time.
While this indicator may seem counterintuitive, lower volatility periods indicate a greater likelihood of explosive moves. This is due in part to the fact that realised volatility is a backward-looking indicator. Traders often over-leverage during quieter periods, which results in larger liquidations during sharp price moves.
Over the last two years, the data indicates an average 50-day volatility of 74%. Historically, the indicator has accelerated as it approaches 80 percent, but this is not a guarantee. The data from February and April 2017 provide a rebuttal to this thesis.
Volatility is ineffective at distinguishing bull and bear markets because it measures only absolute daily oscillations. Additionally, a period of low volatility is not indicative of an impending dump.
What if CZ is privy to information that we are not?
Given how well-connected the founder of the world's largest crypto exchange is, there's always a chance that CZ has some inside information, but if someone is that certain about an upcoming event, the odds are they'll know whether the impact is positive or negative. Once again, anticipating "significant volatility" for the "next couple of months" does not imply confidence in any direction.
Assume he was correct, and crypto volatility is on the verge of surpassing the 100% annual level. A strategy that fits this scenario and allows investors to profit from a strong move in either direction exists.
The reverse (short) iron butterfly option trading strategy is a low-risk, low-reward option trading strategy. It's critical to keep in mind that options have a fixed expiration date; thus, the price increase must occur during the specified period.
The bullish strategy proposed here is to sell 1.23 BTC contracts of the $52,000 put options while simultaneously selling 0.92 BTC contracts of the $80,000 call options. To complete the trade, purchase 1.15 contracts of $64,000 call options and 1.0 contract of $64,000 put options.
While this call option entitles the buyer to acquire an asset, it exposes the contract seller to potential negative exposure. To be completely protected against market fluctuations, an investor must deposit 0.174 BTC (approximately $11,000), which represents the investor's maximum loss.
Because the risk-reward ratio is ambiguous, the trader must be convinced.
To profit from this investment, Bitcoin's price must be below $54,400 on December 31, 2021 (a 14% decline) or above $75,500. (up 19 percent ). The theoretical risk-reward ratio is unfavourable, as the maximum payout is 0.056 BTC and the maximum possible loss is more than three times that amount.
However, if a trader is certain that volatility is imminent, a 20% move from $63,000 in 66 days appears feasible. Traders should keep in mind that the investor can reverse the operation prior to the options expiry date, preferably immediately following a significant Bitcoin price move. All that is required is to repurchase the two options that were sold and sell the other two that were previously purchased.
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By Crypto PiratesHere's how options traders would trade the "extreme volatility" predicted by Binance founder Changpeng Zhao for the cryptocurrency market over the next "few months."
Volatility is a complicated statistical measure that traders and investors frequently employ. When the term is used, those unfamiliar with it will almost certainly attribute analysts with some sort of special standing. However, as demonstrated by a recent comment by Changpeng Zhao, founder of the Binance exchange, the majority of the time, people are unaware of what volatility means.
This is not the first time CZ has erroneously assumed something about that subject. In May, CZ stated that volatility was "not unique to crypto," despite the fact that multiple sources, including Cointelegraph, indicated that no S&P 500 stock, with the exception of Tesla, had a yearly volatility of more than 70%.
What is volatility, then?
Volatility is a measure of how large daily price fluctuations are, and a higher level of volatility indicates that the price can change dramatically in either direction over time.
While this indicator may seem counterintuitive, lower volatility periods indicate a greater likelihood of explosive moves. This is due in part to the fact that realised volatility is a backward-looking indicator. Traders often over-leverage during quieter periods, which results in larger liquidations during sharp price moves.
Over the last two years, the data indicates an average 50-day volatility of 74%. Historically, the indicator has accelerated as it approaches 80 percent, but this is not a guarantee. The data from February and April 2017 provide a rebuttal to this thesis.
Volatility is ineffective at distinguishing bull and bear markets because it measures only absolute daily oscillations. Additionally, a period of low volatility is not indicative of an impending dump.
What if CZ is privy to information that we are not?
Given how well-connected the founder of the world's largest crypto exchange is, there's always a chance that CZ has some inside information, but if someone is that certain about an upcoming event, the odds are they'll know whether the impact is positive or negative. Once again, anticipating "significant volatility" for the "next couple of months" does not imply confidence in any direction.
Assume he was correct, and crypto volatility is on the verge of surpassing the 100% annual level. A strategy that fits this scenario and allows investors to profit from a strong move in either direction exists.
The reverse (short) iron butterfly option trading strategy is a low-risk, low-reward option trading strategy. It's critical to keep in mind that options have a fixed expiration date; thus, the price increase must occur during the specified period.
The bullish strategy proposed here is to sell 1.23 BTC contracts of the $52,000 put options while simultaneously selling 0.92 BTC contracts of the $80,000 call options. To complete the trade, purchase 1.15 contracts of $64,000 call options and 1.0 contract of $64,000 put options.
While this call option entitles the buyer to acquire an asset, it exposes the contract seller to potential negative exposure. To be completely protected against market fluctuations, an investor must deposit 0.174 BTC (approximately $11,000), which represents the investor's maximum loss.
Because the risk-reward ratio is ambiguous, the trader must be convinced.
To profit from this investment, Bitcoin's price must be below $54,400 on December 31, 2021 (a 14% decline) or above $75,500. (up 19 percent ). The theoretical risk-reward ratio is unfavourable, as the maximum payout is 0.056 BTC and the maximum possible loss is more than three times that amount.
However, if a trader is certain that volatility is imminent, a 20% move from $63,000 in 66 days appears feasible. Traders should keep in mind that the investor can reverse the operation prior to the options expiry date, preferably immediately following a significant Bitcoin price move. All that is required is to repurchase the two options that were sold and sell the other two that were previously purchased.
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