Is it time to ‘buy’ volatility? – Astronaut Capital
Well when we were talking about Covered Calls a few weeks ago, IV premiums were high, meaning those people selling calls against their BTC holdings could generate a very nice yield due to a spike in premiums.
Looking at the current market however, the opposite is true. This means that the buying of puts or calls for directional trading purposes is of relatively good value on a historical basis.
For a refresher on buying Puts and Calls see here.
Buying an ATM Put essentially means that you are taking a bearish view on the market, while buying an ATM Call means that you are taking a bullish view.
With this aside, the real value in directional trading of options is in the expectation of increased volatility. As IV is one of the main components in options pricing, a sudden spike in market volatility can lead to a rapid increase in premiums (irrelevant of whether you are holding a call or a put).
Those who are able to buy volatility at the right time can benefit from this strategy in a huge way.
If you have your head around options trading, or just want to learn more, there are a few strategies to look at in times of low volatility.
Buy a Call or Put — A strategy in which you are taking a one-directional view on the market (either bullish or bearish).
Buy a Straddle — A strategy in which you buy both an ATM Call and a Put, expecting the market to move significantly in either direction. (The end result is that you lose on one trade and hopefully do extremely well on the other).
Buy a Strangle — The same as a straddle, however each leg is bought Out-of-the-money (OTM) therefore reducing upfront cost of premiums.
Vertical Spreads — Used to take advantage of a directional move, but reduces the potential profit by lowering the premiums (selling vol at a different strike).
Options are a segment that will be heating up alot in the near future. We have seen the options market evolve significantly in recent months (thanks Skew), and with the launch of Bakkt options in December and CME options in January, this will only add fuel to the fire.
But be careful. Options are extremely complex instruments and such derivatives are fraught with liquidity risk if you don’t know what you are doing. (AKA, none of this was/is trading advice).
Stay safe out there.
Until next time,
Astronaut Capital
Published at Tue, 19 Nov 2019 03:20:40 +0000
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