Selling Volatility is an options trading strategy where a trader sells, or writes, options contracts, typically calls, puts, or combinations thereof, to collect premium. This strategy yields profit when the actual volatility of the underlying digital asset is lower than the implied volatility priced into the options, or when the asset price remains within a predefined range. It represents a directional bet on market stability or a decrease in expected price fluctuations.
Mechanism
A trader initiates this strategy by submitting sell orders for options contracts through a derivatives exchange or an Over-The-Counter (OTC) desk. The trading system facilitates the immediate collection of the option premium into the trader’s account while simultaneously establishing margin requirements to cover potential losses. Risk management systems continuously monitor the underlying asset’s price, implied volatility, and the options’ Greeks to dynamically manage the position’s exposure.
Methodology
This strategic approach primarily aims for income generation from the premium received, particularly in markets perceived as overestimating future price movements. It presents a risk-reward profile with a defined maximum profit, limited to the premium collected, and potentially unlimited loss, necessitating careful position management. The underlying market assumption is that the crypto asset will either remain stable, move favorably, or that implied volatility will decline over the option’s lifespan.
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