Volatility, in the mathematical terms which we may have heard at school, is defined like this:
“Standard deviation, or Square root of variance”
II. How volatility can be used?
A straddle is a strategy buying a call and a put of the same strike price and expiry date.
For example, given the current price of the underlying, BTC Spot, is $7,500. You forecast the BTC price will undergo severe volatility with upcoming events, but are not sure about whether it will go up or down. So you decide to implement an options straddle strategy, by buying both call and put BTC options, strikes at $7,500, which will expire in 7 days, and pay the option premium, $207 and $206, respectively.
Case1. After the event, the market moves down to $6,900 and the options expire. What will your final PnL be?
You can opt for a short straddle strategy, by selling both call and put options of the same strikes and expiry. Thus, in the Case 3 scenario, the PnL would be $213 (= 207 + 206–200), which is profit, secured by collecting the options premiums.
A strangle is a strategy of buying a call and a put of the same expiry date, but different strike prices.
Let’s look into it with a similar example. Given the current price of the underlying, BTC Spot, is $7,500, and your forecast the price and direction are as same as the above example. You considered straddle but it is expensive to implement, so you are now going for a put strangle strategy, by buying a $7,800 strike call and a $7,200 strike put BTC options, expiring in 7 days. You pay options premiums $100 and $70 respectively.
Case1. On the expiry date, the market moves sharply, down to $6,900 and the options expire. What will your final PnL be?
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.