Options trading strategies in a low volatility environment.

Published in
5 min readOct 28, 2022

Against the backdrop of declining volatility in the cryptocurrency market, selling CALL or PUT options begins to lose relevance due to low premiums. Instead, market participants can take a closer look at option structures like a straddle or strangle, but they have nuances. As we’ve often said, an option is just a tool worth using if you understand the underlying asset.

We will remind you how many market participants used to earn. The value of the option, or the premium, depends on the time to expiration and volatility. The higher the volatility, the more expensive the option. The seller’s task was to sell the option at such a price (strike), so that it would not be in the money by the expiration date. In the language of traders: “sell volatility with a distant delta”.

Again, let us remind you that “delta” is the coefficient that shows the relationship between the change in the option premium and the change in the underlying asset price. That is, options in the money have “delta” = 1 (+1 for CALL and -1 for PUT). Thus, “selling volatility with a far delta” boiled down to selling a CALL above the market by 30% or higher and a PUT below the market by 30% or lower. The such strategy made excellent money on weekly options.

The market is characterized by low volatility, so you can pay attention to option strategies like buying a straddle or a straddle. Such approaches are used when one does not know where the market is going to go and expects a surge in volatility to occur on a certain horizon. The loss is limited to the funds spent to purchase the options.

The idea of a straddle and a strangle is to buy a PUT and a CALL option with the same (or different for a strangle) expiration date and either the same strikes (straddle) or different strikes (strangle).

For this strategy, it is important to remember the greeks: theta and vega. Theta is responsible for the time decay and shows by how much the option price decreases daily for the same level of volatility. As we get closer to the expiration date, the time decay accelerates. Typically, the time disintegration enters the acceleration stage after ⅔ of the time before expiration.

Vega shows the relationship between a 1% change in volatility and the value of an option. If let’s say vega equals 3 — it means that a 1% change in volatility changes the price/premium of the option by $3.

Thus, consider the theta acceleration and vega when trading such strategies. Ideally, you should plan your option horizon so that the main events affecting the volatility spike are within ⅔ of the expiration time frame. After a surge in volatility, you close the position you bought. Keep in mind that the other “leg” is actually not working and it already starts a completely different story (the market went up, the PUT option burned out/transferred, etc.).

Events that will affect the cryptocurrency market during November:

  • US interest rate meeting (FOMC) → November 2
  • U.S. congressional elections → November 8
  • U.S. consumer inflation → November 10

Note the ratio of “greeks” for “in the money” and “deep out of the money” options.

Example (this example is purely for educational purposes and as it’s often said in physics class: “suppose a body moves in a vacuum and no forces act on it”).

Let’s imagine we have 2000 USD, a bitcoin is worth 20 500 USD, we buy a PUT options for 930 and a CALL options for 930 with expiration on November 18, so we have spent 1860 USD.

On November 3 (6 days have passed) some very positive news came out and bitcoin rose to 22 000, volatility, let’s say, rises by 40%. As a result:

Options are “in the money” for 1 500 USD

  • Time Value = 800 (which is calculated as 20% multiplied by 20 mils) — 6*25 = 650 USD.

The total is 2150 USD. In fact we are in the plus of 245 USD for 6 days (here we take into account the fate of the option PUT = 0)

Let’s imagine we have 2000 USD, a bitcoin is worth 20 500 USD, we buy 8 PUT options for 120 and 8 CALL options for 120 with expiration date on November 18, so we have spent 1920 USD.

On November 3 (6 days have passed) some very positive news came out and bitcoin rose to 22 000 USD, volatility (let’s say) by 40%. What we have:

Now we are left with only the time value. Vega and theta calculation: 8 options * 8*40 = 2496–6*8*12 = 1920. In fact, we are at 0 now.

As we see, buying volatility is not so obvious. This tool is useful to know. But it should be used very carefully.

What else can be applied in the current environment is to sell the construction higher on a very long delta. Alternatively, if you understand the underlying asset, sell a PUT (СALL) and buy a CALL (PUT) with different expirations. Selling the PUT gives you the opportunity to get the underlying asset at the price you want, and use the premium to buy the opportunity to participate in growth. Or vice versa if you are betting on a market decline.

Sell 19 000 PUT and buy 22 000 CALL — I am willing to buy bitcoin at 19 000 USD, but expect the price of the underlying asset to rise above 22 000

Sell 24 000 CALL and buy 20 000 PUT — I am willing to sell bitcoin at 24 000 USD, but expect the price of the underlying asset to fall below 20 000

Our next reports will be called: Saga 4. We will talk about the Greeks: 1. Delta 2.Vega and Volga 3. Theta 4. Gamma

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