Volatility Yield refers to the return generated by strategies that capitalize on market volatility, typically through the sale of options contracts or the active management of volatility exposure. In crypto investing, its purpose is to extract value from the discrepancies between implied and realized volatility, or from the systematic collection of options premiums.
Mechanism
This yield is generated by strategies such as selling out-of-the-money call or put options, creating synthetic volatility products, or acting as a market maker that profits from bid-ask spreads in options markets. The mechanism involves quantitative models to price options and assess the probability of various price movements, enabling informed risk-taking.
Methodology
The strategic approach involves employing statistical arbitrage, variance trading, or options selling programs that systematically collect premiums. This methodology requires rigorous risk management, including careful position sizing and dynamic hedging, to mitigate potential losses if volatility moves adversely or if options expire in-the-money. It aims for consistent returns by exploiting volatility as an asset class.
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