Is it time to 'buy' volatility?

“Short term volatility is greatest at turning points and diminishes as a trend becomes established”

George Soros (2003). “The Alchemy of Finance”, p.170, John Wiley & Sons

It’s been a few weeks since Dark Pools has made an appearance in your inbox…

Here at Astronaut Cap, we hate sending out pointless emails for the sake of it. How many more times do you need to hear about China’s love/hate relationship with crypto or the never-ending fights between crypto exchanges anyway?

Let’s talk about something interesting.

About six weeks ago, we wrote a segment about an options strategy called ‘Covered Calls’, which allows you to ‘Sell’ volatility in the hunt for extra yield in the market. This strategy is getting more popular by the day, particularly amongst portfolios that are sitting on a stack of BTC.

Today however, our focus turns to ‘Buying’ volatility, in which we elaborate on more directional strategies that are conducive to the current market conditions (at least for now).

Implied volatility for BTC options is really really low right now..

One of the factors that makes up the pricing of puts and calls in the options markets is implied volatility. IV, as it is known, measures the markets expectations of large moves/volatility, and builds this into the options premium.

When IV high, you pay a-lot more when buying a Put or Call. When IV is low - the opposite occurs… and IV is really low right now.

[We thank our friends at Skew, who provide the best derivatives data in the market. You will see us reference them constantly through our material.]

The above chart shows the Implied Volatility for Bitcoin relating to at-the-money (ATM) options. This means the strike price closest to current spot value.

Current volatility is near absolute lows, with the most active 3-month contract at only 67% IV, and the 1-month at 55% IV.

To further expand on this point, we compare Implied Volatility vs Realised Volatility, which illustrates the former against a historical metric (open and closed ranges in the underlying market.)

So what does this mean for options trading?

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.

We aren’t here to give you trading recommendations, but..

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).

Learn what you can now

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

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About Astronaut Capital

Since 2017, Astronaut Capital has been one of the leading asset-managers for cryptocurrencies and digital assets. Utilizing its internal research team at Picolo Research and STO Rating, Astronaut operates long/short strategies to navigate the market on behalf of investors.

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