Changpeng Zhao can predict market fluctuations in cryptocurrencies – this is how you can take advantage of it

Volatility is a complex statistical measure that is widely used by traders and investors. For those unfamiliar with this, analysts will likely assign a special type of “reference” each time they use the term. However, as in a. shown comment According to the latest CEO of the Binance exchange, Changpeng Zhao (CZ), most people don’t understand what volatility means.

“It is forecast that the crypto market will be very volatile over the next few months.”

This is not the first time CZ has made the wrong assumption on the subject. In May, he said the volatility “isn’t unique to cryptocurrencies,” although multiple sources suggest that, with the exception of Tesla, no S&P 500 stock matches Bitcoin’s 70 percent volatility.

So what is volatility?

True (or historical) volatility measures daily price volatility, and higher volatility indicates that prices 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 real volatility is a retrospective indicator. During periods of lower volatility, traders tend to use excessive leverage, which then leads to larger liquidations when the price fluctuates widely.

Bitcoin’s 50-day frame volatility | Source: TradingView

The above data shows an average volatility of 74% over the 50-day framework for 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 is not in itself an indicator of an impending dump.

What if CZ knows things we don’t?

Given how connected CZ is, chances are it has inside information, but if you are too sure about an upcoming event, you will very likely know whether the impact will be 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 assume that the CZ is correct and that the volatility of the cryptocurrency exceeds the annual level of 100%. There is an options strategy that suits this situation and allows investors to benefit from a strong move in either direction.

Reverse Iron Butterfly (Short) is an options trading strategy that limits both risk and profit. It’s important to remember that options have a set expiration date. Therefore, the price increase must take place within the specified period.

Estimated profit / loss | Source: Deribit Position Builder

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

One proposed bullish strategy involves selling 1.23 BTC contracts in a put option with an exercise price of $ 52,000 and a call option of 0.92 with an exercise price of $ 80,000. To complete the trade, people should buy 1.15 contracts with call options at $ 64,000 and another contract with put options with an exercise price of $ 64,000.

While this call option gives the buyer the right to purchase an asset, the seller assumes a negative (potential) risk from the contract. For full protection from market volatility, people need to deposit 0.174 BTC (about $ 11,000) which is the maximum loss the investor can lose.

Risk – Reward is always unpredictable, so traders need to be confident

To profit, investors need a Bitcoin price of under $ 54,400 on December 31, 2021 (down 14%) or over $ 75,500 (up 19%). 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 reverse operations before the option expires, preferably immediately after the Bitcoin price fluctuates. All people have to do is buy back the 2 options that were sold and sell the remaining 2 options that were previously bought.

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Disclaimer: This article is for informational purposes only, not investment advice. Investors should research carefully before making a decision. We are not responsible for your investment decisions.

Mr. Teacher

According to Cointelegraph

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