How to use volatility trading strategies in the cryptocurrency market
The price of a cryptocurrency can change due to many factors. One of the most important factors is volatility, which means how volatile or stable the price of a cryptocurrency is.
Volatility trading strategies are used to trade on the volatility of a cryptocurrency, which is determined by the amount of change in its price. A trader can choose between buying or selling their position based on how much they think it will change from one day to another. In this article, we will review some of the most popular volatility trading strategies and give you an idea about how they work.
What Is Volatility Trading?
Volatility is basically how much security fluctuates in value over time due to market forces such as supply and demand (for more information about this subject see our article "What Is An Options Strategy?"). The main reason why traders use volatility trading strategies is that these changes provide them with opportunities for gains when prices become volatile (i.e., go up or down rapidly), but also protect them from losing money when prices remain stable over long periods of time (i.e., weeks or months).
A) Long straddle
A long straddle is a type of option strategy that involves buying call and put options. This can be done in two ways:
- Long straddles are created when you buy a call option with strike price above the current market price, and also buy a put option with strike price below your desired entry point.
- The profit potential from this strategy depends on how volatile cryptocurrencies are at the time you enter into this trade. If they’re more volatile than usual, then there will be greater risk involved in making profits from short-term volatility spikes since these movements tend to happen quickly (within days or weeks). On the other hand, if there’s less volatility in general then your losses may be lessened as well!
B) Short straddle
A short straddle is a neutral strategy that involves the simultaneous sale of a call and put option with identical strike prices and expiration dates. The investor will profit from a large move in the underlying asset.
The following table shows how you can go about writing this strategy in terms of risks:
C) Long strangle
A long strangle is a neutral strategy that involves buying both a put and call option on the same underlying asset. The investor makes money if the underlying asset price moves significantly either up or down, but loses money if it stays within a small range.
This type of trading strategy can help you earn profits in situations where your expectations are not met by reality, such as when there is no change in volatility over time or when there’s no major news event happening at that moment. In these cases, buying puts with high premiums can be helpful because they will give you some protection against losses while waiting for more favorable conditions before entering into long positions again (such as after prices drop).
D) Short strangle
The short strangle is a volatility trading strategy. It involves buying two put options and selling one call option, which has a lower strike price than the underlying asset. This can be done in order to limit your risk when you think that the market will not move.
If you are bullish on an asset and want to increase your exposure, then selling a call option with less than $0$ premium (or $100) will allow you to do so at a lower cost than buying an equivalent amount of shares outright. Since this strategy involves selling 100 shares worth $10 each, then it costs just 10 cents per share if they are available at that price level ($10). If they aren't available at that price level though, then there's no way we could buy them directly from our broker who doesn't have enough inventory available anyway!
E) Butterfly Spread
Butterfly spreads are a neutral options strategy that involves buying and selling two at-the-money call options and one out-of-the-money call option. This type of spread involves three contracts, with each contract consisting of a cap (an upper boundary) and a floor (a lower boundary). Theoretically, this strategy profits when the underlying asset makes no price movement.
Butterfly spreads can be used to profit from volatility in various ways:
- Buying one long position and selling two short positions for example could be used as an adjustment strategy for your portfolio if you believe there will be more upward movement than downward movement in cryptocurrency prices over the next few weeks or months. For example, if Bitcoin sells off sharply due to news about South Korean regulators cracking down on cryptocurrency exchanges there might be an expectation by investors that other cryptocurrencies will rise quickly too! So if your target is $20k worth per share at any time then buying some shares at $16k per share would give you an extra $1k profit on top of what would happen naturally without doing anything special like this; however if these prices drop below where they were previously trading around then those additional gains become less valuable due because they've already been made up by losses elsewhere within our portfolio (e..g., Ethereum).
F) Iron butterfly
The iron butterfly is a volatility trading strategy that combines a long straddle and a short strangle. This means that it profits from both rising and falling prices in the market, which can be achieved by buying options with different expiration dates.
The iron butterfly was first used by Robert Merton in 1982, who was working for Goldman Sachs at the time. He wrote about it in his book "Option Volatility Models: An Introduction to Statistical Methods for Options Pricing".
You can make a profit even if there is no price change on the market. However, you will lose money if the price moves in the opposite direction. The longer the time horizon, the more risk you take.
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