Volatility is a complex statistical measure that is widely used by traders and investors. For those unfamiliar with this, analysts are likely to refer to a special type of “position” when the term is used. However, as a recent comment from Binance exchange’s founder Changpeng Zhao shows, most people don’t know what volatility means.

Expect very high volatility in #Crypto in the next month.

– CZ Binance (@cz_binance) October 21, 2021

This is not the first time CZ has made the wrong assumption on the subject. In May, CZ said the volatility “doesn’t just apply to cryptocurrencies,” although several sources, including Cointelegraph, suggest that no S&P 500 stock goes well with it, with the exception of Tesla: Bitcoin (BTC) 70% annual volatility.

So what is volatility?

Realized (or historical) volatility measures how big the daily price movement is, and higher volatility indicates that price can change significantly in either direction over time.

This indicator may sound counter-intuitive, but periods of lower volatility pose a greater risk of an outbreak. Part of this is because volatility is viewed as an indicator that tends to lag behind. During quieter times, traders tend to use excessive leverage which then results in greater liquidity in the event of sudden price fluctuations.

The above data shows an average volatility of 74% over 50 days over the past two years. In the past the indicator has tended to accelerate when it moves above 80%, but there is no guarantee that such a move will take place. Data from February and April 2017 provide a counter-argument to this argument.

Volatility does not differentiate between bull and bear markets as it only measures absolute daily fluctuations. In addition, a period of calm volatility alone is not an indicator of imminent dumping.

What if CZ knows something we don’t know?

Given how networked the founder of the world’s largest cryptocurrency exchange is, there’s always a chance CZ has inside information, but if you’re too sure about an upcoming event it’s very unlikely they might know the ramifications are positive or negative. Here, too, the expectation of “high volatility” for the “next few months” does not mean that someone believes in any direction.

Let’s say he’s right and the volatility of the cryptocurrency is about to break the 100% annual limit. 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 an option trading strategy with limited risk and limited profit. It is important to remember that options have a set shelf life; therefore the price increase must take place within the specified period.

 

The above price was executed on October 25th with Bitcoin trading close to $ 63,000. All of the options listed are for the December 31st expiration date, but this strategy can be used with any other time frame.

The proposed bullish strategy is to sell 1.23 BTC contracts from put options of $ 52,000 while simultaneously selling 0.92 calls with a decrease of $ 80,000. To complete the trade, buy 1.15 contracts with $ 64,000 call options and another $ 64,000 put option.

While this call option gives the buyer the right to purchase an asset, the seller assumes a negative (potential) risk from the contract. To fully protect yourself from market fluctuations, you need to deposit 0.174 BTC (about $ 11,000), which is the maximum loss the investor can lose.

The risk-to-reward ratio is patchy, so traders need to be confident

In order for this investor to make a profit, one needs a Bitcoin price of under $ 54,400 (down 14%) or over $ 75,500 (up 19%) on December 31, 2021. The theoretical risk / reward ratio is not good as the maximum payout is 0.056 BTC and the potential loss is three times that amount.

However, if a trader is certain that volatility is imminent, a 20% move of $ 63,000 in 66 days seems doable. Traders should note that it is possible for an investor to get back into activity before the option expires, preferably immediately after the Bitcoin price fluctuates. All you have to do is buy back the 2 options you sold and sell the other 2 options you bought previously.

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

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