Binance CEO predicts ‘very high volatility’ in crypto. Here’s how to trade it – News Couple
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Binance CEO predicts ‘very high volatility’ in crypto. Here’s how to trade it


Volatility is a complex statistical measure commonly used by traders and investors. Those unfamiliar with it will likely attribute some kind of special “status” to analysts whenever the term is used. However, as explained in a recent comment by the founder of Binance Exchange, Changpeng Zhao, most of the time people don’t know what volatility means.

This is not the first time that Czechoslovakia has made an incorrect assumption about this. In May, Czechoslovakia said volatility was “not unique to cryptocurrencies,” although several sources, including Cointelegraph, showed that, apart from Tesla, no S&P 500 stock matches Bitcoin (BTC) volatility at 70% annually.

So what is volatility?

Realized (or historical) volatility measures how large daily price fluctuations are and high volatility indicates that price can change significantly over time in either direction.

This indicator may seem counter-intuitive, but periods of low volatility present a greater risk for explosive movements. This is partly due to volatility achieved as a declining indicator. During quieter periods, traders tend to over-leverage, which then leads to larger liquidations during sudden price movements.

Bitcoin volatility for 50 days. Source: TradingView

The above data shows an average of 74% of the 50-day volatility over the past two years. Historically, the indicator tends to accelerate as it moves above 80% but there is no guarantee that such a movement will occur. Data from February and April 2017 provide a counterargument to this thesis.

Volatility does not differentiate between bullish and bearish markets because it exclusively measures absolute daily oscillations. Moreover, the period of quiet fluctuations in itself is not an indication of an upcoming dump.

What if CZ knew something we don’t?

Given how connected the largest cryptocurrency exchange founder in the world is, there is always the possibility that CZ has some inside information, but if one is very certain about an upcoming event, they will likely know whether the effect is positive or negative. Again, an expectation of “high volatility” over the “next two months” does not indicate a person’s confidence in any direction.

Let’s say he was right, and the volatility of the cryptocurrency is about to break through the 100% annual level. There is an options strategy that fits this scenario and allows investors to benefit from a strong move in either direction.

The Reverse Iron Butterfly (Short) is a limited risk and limited profit options trading strategy. It is important to remember that options have a specific expiration date; Therefore, the price increase must occur within the specified period.

Estimating profit/loss. Source: Deribit Position Builder

The above prices were taken on October 25, with Bitcoin trading near $63,000. All options listed are for expiration on December 31st, but this strategy can also be used using a different timeframe.

The suggested bullish strategy consists of selling 1.23 BTC put options with a value of $52,000 while simultaneously selling 0.92 call options with a strike of $80,000. To finish the trade, one would have to buy 1.15 contracts of $64,000 of call options and another 1.0 contracts of put options of $64,000.

While this call option gives the buyer the right to an asset, the seller of the contract gets a negative (potential) exposure. To fully protect against market volatility, one needs to deposit 0.174 BTC (around $11,000), which is the maximum loss for investors.

The reward risk is minimal, so the trader needs to be convinced

In order for this investor to turn a profit, one would need the bitcoin price to be below $54,400 on December 31, 2021 (down 14%) or above $75,500 (up 19%). The theoretical reward for the risk is not good because the maximum payout is 0.056 BTC and the potential loss is more than 3 times that amount.

However, if the trader is certain that volatility is around the corner, then a move of 20% from $63,000 in 66 days seems possible. Traders should note that the investor can redo the process before the options expire, preferably right after a strong Bitcoin price move. All one needs is to buy back the two options that were sold, and sell the other two options that were previously bought.

The opinions and opinions expressed here are solely those of author and do not necessarily reflect the opinions of Cointelegraph. Every investment and trading movement involves risks. You should do your research when making a decision.