In the dynamic sphere of cryptocurrency, Bitcoin (BTC) volatility metrics are at record lows, predicting a possible uphill climb back to normalization. However, some traders speculate that the cheering around spot-ETF applications has started to lose its lustre, making options appear costly.
The risky strategy of defying volatility through options necessitates enterprising management of the position. Market buzz about an imminent BTC volatility explosion is rife. So much so, that many crypto traders are developing strategies that bet against price turbulence, manifesting a bias for shorting volatility.
Since July 24, Bitcoin, the leading cryptocurrency by market value, has been largely trading between $29,000 to $30,000. This range falls below the $30,000-$32,000 range witnessed in the preceding four weeks. The cryptocurrency has not exhibited rises more than 4% in a single day since June 21.
Due to this behavior, Bitcoin’s key metrics measuring backward-looking realized volatility and future or implied volatility have plummeted to multiyear lows. As volatility is notoriously mean-reverting, and higher volatility can boost options prices, some market participants anticipate sudden, significant price turbulence.
To profit from these supposedly brewing changes, market participants contemplate buying BTC call or put options, the former providing protection against bullish moves, and the latter shielding against bearish turns. This practice is called the long volatility trade. However, Greg Magadini, the director of derivatives at Amberdata, suggests contemplating a short trade.
Whether Bitcoin will experience increased volatility hinges on it scoring new year-to-date highs. The most evident catalyst for such a move revolves around a spot ETF for BTC, cites Magadini. But he believes the ‘base case’ in this environment favours short-vol bias.
Traders generally short volatility by selling call or put options. This strategy is preferred when realized and implied volatility metrics seem rich compared to their historical norms or lifetime average, when a catalyst for price moves is lacking, and when implied volatility surpasses realized volatility.
At present, realized volatility (RV) and implied volatility (IV) stand at multiyear lows, which doesn’t favour selling options or shorting volatility. However, the elation around U.S. spot-ETF filings by giants like BlackRock and Invesco has dwindled, and a final decision by the SEC remains distant.
Shedding light on the scenario, Griffin Ardern from crypto asset management firm Blofin termed selling volatility as one of the existing profitable trading strategies.
But caveats exist: Shorting volatility or selling options can invite colossal losses if the market shifts abruptly. It demands a generous supply of capital and expertise. One can alleviate associated risks by buying out-of-the-money (OTM) options in case a market move ensues.
A rise above $32,000 could bring a bullish spot trend and volatility bloom. Purchasing long-term OTM call ‘tails’ can serve as an interesting way to hedge against a short-vol play, recommends Magadini.
Source: Coindesk
