The Binance CEO expects the “very high volatility” of cryptocurrencies.This is how to trade it


Volatility is a complex statistical indicator commonly used by traders and investors. Whenever the term is used, those who are not familiar with it may think that the analyst has a special “status”. However, as shown in recent comments by Changpeng Zhao, founder of Binance Exchange, most of the time people don’t know what volatility means.

This is not the first time CZ has made false assumptions on this topic. In May, CZ stated that volatility is “not unique to cryptocurrencies,” despite multiple sources, including telegraph, Indicating that apart from Tesla, there are no S&P 500 stocks and Bitcoin (Bitcoin) 70% annual volatility.

So what is volatility?

The realized (or historical) volatility measures how much daily price fluctuations are, and a higher volatility indicates that prices can change drastically in either direction over time.

This indicator may sound counterintuitive, but periods of lower volatility represent a greater risk of explosive volatility. This is partly because the realized volatility is a backward looking indicator. During calmer periods, traders tend to over-leveraged, which leads to greater liquidation when prices fluctuate suddenly.

The 50-day realized volatility of Bitcoin. Source: TradingView

The above data shows that the average volatility over the past two years and 50 days was 74%. Historically, this indicator tends to accelerate when it exceeds 80%, but there is no guarantee that this movement will occur. The data from February and April 2017 provide a rebuttal to this paper.

Volatility does not distinguish between a bull market and a bear market because it specifically measures absolute daily oscillations. In addition, on its own, a period of calm volatility is not an indicator of an impending sell-off.

What if CZ knows what we don’t?

Considering the contacts of the founders of the largest cryptocurrency exchange in the world, it is always possible for CZ to have some internal information, but if a person is very sure about the upcoming event, they are likely to know whether the impact is positive or negative. Once again, the expected “high volatility” in the “next months” does not indicate that anyone is confident in any direction.

Let us assume that he is right, the crypto volatility is about to break the 100% annual level. There is an option strategy that suits this situation and allows investors to profit from strong movements in either direction.

Reverse (short) Iron Butterfly is an option trading strategy with limited risks and limited profits. It is important to remember that options have a set expiration date; therefore, price increases must occur within a specified period.

Profit and loss estimates. Source: Deribit Position Builder

The above price is taken from October 25th, and the Bitcoin transaction price is close to $63,000. All options listed are for expiration on December 31, but different time frames can also be used to use this strategy.

The recommended call strategy includes selling 1.23 BTC contracts with USD 52,000 put options, while selling 0.92 call options with a strike price of USD 80,000. To complete the transaction, you should purchase 1.15 USD 64,000 call option contracts and another 1.0 USD 64,000 put option contract.

Although this call option gives the buyer the right to purchase assets, the contract seller acquires (potentially) negative risk. In order to completely avoid market fluctuations, 0.174 BTC (approximately US$11,000) needs to be deposited, which represents the investor’s maximum loss.

The risk of return is rough, so traders need faith

In order for the investor to be profitable, the price of Bitcoin needs to be below US$54,400 (a drop of 14%) or higher than US$75,500 (a rise of 19%) on December 31, 2021. The theoretical risk return is not good, because the maximum payout is 0.056 BTC, and the potential loss is more than 3 times the amount.

Nonetheless, if the trader determines that volatility is imminent, a 20% rise from $63,000 in 66 days seems feasible. Traders should note that investors can resume operations before the option expires, preferably immediately after the Bitcoin price fluctuates strongly. All one needs to do is to repurchase the 2 sold options and sell the other 2 previously purchased.

The views and opinions expressed here only represent author It does not necessarily reflect the views of Cointelegraph. Every investment and transaction involves risks. When making a decision, you should conduct your own research.