Most options expire worthless and the premium is lost by the buyers of those options to their writers. Options are excellent for hedging but are not a great vehicle for speculation except in specific, unusual circumstances.
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.)
At time of writing (26 March 2019) Bitcoin volatility has been falling all through 2019 and is approaching its mid-November 2018 lows.
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%.
+ High Open Interest
Open Interest is the total number of open derivatives (futures or options) contracts. For each buyer of the Bitmex swap there must be a seller. From the time the buyer or seller opens the contract until the counter-party closes it, that contract is considered ‘open’. OI is (together with volume) an indicator of derivatives liquidity. The high OI shows that the current low volatility is not a function of traders getting bored with Bitcoin and quitting the market. There is tremendous liquidity stacked up waiting for price action.
How to Buy Bitcoin Volatility
Equity traders can Long and Short US equity volatility by trading the VIX Future. VIX - the ticker of the CBOE Volatility Index - measures the stock market’s expectation of volatility implied by S&P 500 index options. You cannot trade Bitcoin volatility using the swaps and futures at Bitmex or the CME as there is no volatility contract. It can only be done indirectly, the old-fashioned way, by trading Bitcoin options at Deribit.
Buy a Straddle
A straddle is an options strategy to buy volatility by buying a Call and a Put, both At-The-Money. (i.e. Strike is equal to the price of the underlying.)
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:
Buy a Strangle
A strangle is an options strategy to buy volatility by buying a Call and a Put that are both just Out-Of-The-Money. (i.e. Call Strike > the price of the underlying, Put Strike <the price of the underlying .)
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.
How to Sell Volatility
Sell it when it is high. But this is an ultra-risky strategy.
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.
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 [Tippin.me link]
Resources for Bitcoin Options Traders: