How to Increase Your Odds When Price Does Nothing
The doldrums of crypto.
Traders hate them. Boredom sets in, you start scrolling through twitter unnecessarily and find yourself wondering if now is a good time to finally read War and Peace.
It’s where we currently find ourselves in crypto. The dreaded range bound trade. Stuck between $10,000 and $8,900 for the last thirty days.
The fear for most traders is the market will just rip open the minute you decide to stop paying attention.
Or – and I know I’ve been guilty of this before – enter trades unnecessarily. I know for me when I’ve done this the probabilities on these trades were worse than a gas station lottery ticket.
Luckily, the times are changing for crypto. Specifically, the options market is becoming more robust by the day. Letting us turn boring periods into high probability opportunities. For me, I welcome this type of market because I can load up on one of my favorite strategies in trading…
Going long on volatility.
Why It’s All About Implied
Wait a second… Am I seeing this right? Price went down 5%… I bet the price would go up… Yet I’m in profit? This makes no sense. This can’t be right…
This line, which recently came from a customer, sums up volatility. When it comes to options many times it’s more about timing than about guessing if price will go up or down.
In this particular case I thought a good trade to make was buying both a call option and a put option. The market was putting traders to sleep just like it is today, so to me it was a way to go long on volatility. Said a different way, it was a bet that price wouldn’t continue going sideways for much longer.
When it comes to markets, prices tend to go sideways, consolidate, then just explode out of nowhere. It’s the ebb and flow. One that really says periods of low volatility are always followed by periods of high volatility. Yet, it’s this market dynamic that causes impatient traders to scramble and get into positions at less than ideal levels.
So what we are really doing when we go long volatility is assuming normal market dynamics will happen. Aka this period of low volatility will be followed with high volatility.
Now, when it comes to options, a call option in its simplest form is a bet that price will go up. A put is when you bet the price is going down. Pretty simple.
Where it gets a bit confusing is in what goes into the price of these call and put options. It has to do with some equation that may feel as if its roots are tied to some marble floored and oak laden wall of some MIT Economist. The equation is the Black Scholes, and its really not that crazy. Nor do you really need to dig into it.
What you really need to know is one of the most important variables in that equation is something called implied volatility (IV). It’s a measure of future volatility. So if the markets do what they are doing today and go sideways, IV goes lower.
If the markets start rippin’ and act like a bucking bronco, IV will soar.
This is really important to nail down because when IV soars, the price of options soar with it.
So what this means to you is, with IV going low, you have a great chance to go long volatility. That is, only if you think IV will fly higher over the next few weeks.
What About Now?
As far as what IV looks like today. Here’s a chart that can show how much IV has dropped over the last thirty days. We’ve gone from over 70% to nearly 45%. That’s significant.
Which means option pricing steadily dropped over the last thirty days. Which is great for us… But you’re probably sitting there thinking, yea! But what do I do?
I say straddle it. Believe it or not, a ‘straddle’ is an options strategy. One that works well when you are unsure what direction price will go.
To open a straddle position, a trader buys both a call option and a put option with strike prices near the current price.
(Don’t get too caught up with strike prices right now. We’ll broach that topic later. And frankly, if you are unsure with what a strike price is, consider experimenting with this trade on paper. Not with real money)
The trade starts to work out when price decides to get all crazy again. The beauty of this trade is you might find yourself in a really good position. One where you can sell the option that’s betting in the wrong direction at a profit. Then ride the profits on the other.
It’s how you go long volatility.
Keep in mind, this is what I mean by a high probability trade. With volatility at a monthly low, going long on it is a high probability event.
And when it comes to Jarvis, we pair our options up with our trading system in terms of timing. When Jarvis starts to let us know volatility is near, we enter our position. It’s a way to give us even more of an edge.
Hopefully we can see these doldrums end soon. But in case they don’t, stay tuned to more on options because we’ll be coming back to this topic a lot more in the coming week.
Until next time, we’re on the scent…
Click here to read our latest Market Outlook report.
About Jarvis Labs: We are a team of passionate professionals with experience in data science, software engineering, economics and trading who came together to develop Jarvis, an artificial intelligence / machine learning software that tracks market movers. We’ve since gone on to become a one stop shop for crypto traders by building new tools, metrics, and platforms every day. Stop by Jarvis Labs to learn more and subscribe to our newsletter to learn what market mover is driving the market today.