Volatility premium harvesting is an options trading strategy that aims to profit from the empirical observation that implied volatility, derived from options prices, consistently exceeds subsequent realized volatility, which represents the actual price fluctuations of the underlying asset.
Mechanism
This mechanism typically involves selling options contracts, such as calls or puts, thereby collecting the associated premium. Traders profit if the underlying asset’s price movements remain contained, allowing the options to expire worthless or to be repurchased at a lower cost, thus capitalizing on the decay of the options’ extrinsic value.
Methodology
The strategic approach involves identifying assets where implied volatility appears inflated relative to historical or projected future realized volatility, then systematically selling options while managing risk exposure. In crypto institutional options trading, this methodology leverages quantitative analysis and statistical models to select optimal strike prices and expiration dates, seeking to consistently capture this premium while employing hedges against potential extreme price movements in volatile digital asset markets.
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