As market chatter about an impending volatility explosion in Bitcoin (BTC) continues, some crypto traders are setting up strategies to bet against price turbulence. BTC has been trading in the range of $29,000 to $30,000 since July 24, and its price hasn’t risen more than 4% in a single day since June 21. This has caused key metrics gauging Bitcoin’s backward-looking realized volatility and estimated or implied volatility to drop to multiyear lows.
Some traders are anticipating sudden and notable price turbulence and are considering buying BTC call or put options to profit from the change. This is known as the long volatility trade. However, Greg Magadini, director of derivatives at Amberdata, suggests considering a short trade. He said, Upside volatility likely remains far away unless BTC can take new year-to-date highs. The clearest catalyst for this currently revolves around a BTC spot ETF. I continue to believe the ‘base case’ in this environment is to lean towards the short-vol bias, (in the near term).
Traders typically short volatility by selling or writing call or put options. This strategy is preferred when realized and implied volatility metrics appear rich relative to their historical standards or lifetime average, there is a lack of catalysts for price moves and implied volatility is greater than realized volatility. Currently, these metrics are hovering at multiyear lows, which does not favor selling options or shorting volatility. However, the other two factors do.
Griffin Ardern, a volatility trader from the crypto asset management firm Blofin, expressed a similar view, saying that selling volatility is one of the few profitable trading strategies. He said, The implied price-moving range of the current 7-day average IV is about 4% for BTC. Still, the realized daily price moving range is less than 1%, or even less than 0.5%, which means that selling volatility will have relatively good returns, although the current IVs are also at historically low levels.
Shorting volatility or selling options is a risky business, which can result in huge losses if the market moves suddenly. To mitigate this risk, Magadini suggests purchasing out-of-the-money (OTM) options if and when the market moves. He said, A move above $32,000 could bring both a bullish spot trend and an explosion in volatility with it. Buying long-term out-of-the-money call ‘tails’ is an interesting way to hedge a short-vol (near/medium term maturity) play.
Overall, shorting volatility in Bitcoin is a risky strategy that requires an ample supply of capital and expertise. However, it can be a profitable trading strategy if done correctly.