Volatility Straddles are a neutral options trading strategy that involves simultaneously buying or selling both a call and a put option on the same underlying crypto asset, with identical strike prices and expiration dates. This strategy profits from significant price movement in either direction (long straddle) or from minimal price movement (short straddle). Its purpose is to capitalize on expectations of high or low volatility.
Mechanism
A long straddle is executed by purchasing both options, benefiting if the crypto asset’s price moves sharply up or down, exceeding the combined premium paid. A short straddle involves selling both options, profiting if the asset’s price remains stable within a narrow range, allowing the options to expire worthless. The mechanism relies on changes in the underlying asset’s price and its implied volatility.
Methodology
Institutional traders employ volatility straddles to express a view on expected price dispersion in a cryptocurrency, often around significant market events or news announcements. Risk management involves careful selection of strike prices and expiration dates, monitoring implied volatility, and dynamically adjusting positions as market conditions change. This strategy is critical for managing exposure to price uncertainty in the highly volatile crypto options market.
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