Short Volatility describes a trading strategy designed to profit from a decrease in the price fluctuations of an underlying asset or from a reduction in its implied volatility. This position typically performs well when the asset’s price remains stable or exhibits limited movement.
Mechanism
This strategy is commonly implemented by selling options contracts, such as naked calls, naked puts, or credit spreads, thereby collecting premiums. These positions benefit from the time decay of options value and reduced price swings, which cause options premiums to diminish.
Methodology
The methodology involves assessing market conditions to identify assets where implied volatility is expected to contract or where price stability is anticipated. Risk management is critical due to the potential for significant losses if actual volatility unexpectedly increases, requiring careful position sizing and active monitoring of the underlying crypto asset’s price dynamics.
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