At time of writing (26 March 2019) Bitcoin Volatility is nearly back to lows of mid-November 2018. Buying opportunity? But how do you buy something as intangible as volatility?

Buying and Selling Bitcoin Volatility Using Bitcoin Options

Mar 26 · 4 min read
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Risk Warning

Buyers of options are likely to lose what they pay. They will lose money slowly and then quickly as theta decay accelerates as expiry approaches. That said, buyers’ risk in buying options is limited to the premium they pay at the outset, and buying options is less risky than writing them as sellers face margin-calls and unlimited risk.

With those caveats in mind, in my opinion the current low Volatility + high Open Interest state of the Bitcoin futures market represent a great chance to make money from buying volatility. (Current at 26 March 2019.)

Low Volatility

‘The next break of Bitcoin is going to be significant’. Which direction will you pick with your XBTUSD swap or futures trade? A thousand traders on Crypto Twitter will give you their TA-based opinion. Probably about 50% will be right. Or how about buying the volatility so you benefit whichever way the price breaks? The only place you can buy Bitcoin volatility is at the only Bitcoin options exchange. Open an account at Deribit.

The last time Historical Realized Volatility reached these lows, in mid-November 2018:

Buying Bitcoin Volatility has been a great trade whenever its annualised value falls below 30%.

There is an incredibly clear pattern that months with low Bitcoin volatility are followed by months of high volatility. Table created by @Rptr45

+ High Open Interest

How to Buy Bitcoin Volatility

Buy a Straddle

First choose your expiry. There is a choice between building a larger, cheaper straddle at 26-APR or a smaller, more costly one at 28-JUN. I like the former, as it provides more bang for bucks. And my belief is that price will break in the next month.

Buy the Call and Out at the strike closest to the underlying price. That means buy at the 4,000 strike.

We get this PnL chart:

Note how incoming volatility — where the price breaks below or above the current $4000 level, guarantees profit for the buyer of the straddle. The straddle will bleed time value as long as the price remains close to $4000. Charts thanks to Sheet published by @cryptarbitrage.

Buy a Strangle

The strangle is cheaper than the Straddle. It has a higher Risk-Return. If volatility stays low then you are more likely to lose everything you stake.

That means buy the 4,250 strike Call and buy the 3750 Put.

You might also think about a strangle at 4500/3500.

PnL chart:

Charts thanks to Sheet published by @cryptarbitrage

How to Sell Volatility

Table created by @Rptr45

The PnL for selling the straddle is simply the inverted PnL for buy the straddle. Selling volatility is much riskier than buying it. You face unlimited risk. Selling volatility should be left to experienced options traders.

Charts thanks to Sheet published by @cryptarbitrage

The great risks of selling volatility are shown in the case of James Cordier of OptionsSellers, who sold volatility in energy markets in November 2018. There was an explosion of volatility in those markets, and his clients lost their entire accounts, and were liable for margin-calls over and above that.

31 March 2019: If this primer was helpful then you can pay a Bitcoin Tip on Lightning [ link]

Resources for Bitcoin Options Traders:


Written by

Crypto Analyst. BitMEX Expert. Deribit Bitcoin Options Trader. Made