If the financial market is likened to a never-ending marathon, volatility is the heart rate belt on the runner's wrist - it doesn't tell you which direction the runner will run, but it can accurately capture the rapidity and slowness of every breath. When you buy Tesla call options in anticipation of earnings reports, or bet on the price carnival before Bitcoin halving, volatility is like an invisible hand, quietly moving the price scales of these options.

1. The Dual Face of Volatility

Volatility is essentially an "uncertainty scale." Imagine you are standing on the beach observing the tides: Historical volatility (HV) is the average of the wave heights over the past week, telling you how rough the sea is usually; Implied volatility (IV) is the fishermen's prediction of the rough seas that may occur tonight based on the thickness of the cumulonimbus clouds in the sky.

When Tesla released its humanoid robot last year, its 30-day historical volatility was only 35%, but the implied volatility soared to 72% in the week before the earnings report. It's like the weather forecast suddenly changed from "cloudy" to "red rainstorm warning", and the market is willing to pay a higher premium for "possible storms" - at that time, the price of a weekly call option with an exercise price of $300 soared from $8 to $22, of which 60% of the increase came from the increase in volatility expectations.

The Bitcoin market is a natural testing ground for volatility. Before the halving event in 2024, Bitcoin's 30-day HV was stable at 55%, but the monthly option IV of Deribit exchange exceeded 85%. This gap is like a climber who knows that the wind speed on Mount Everest is 50km/h all year round, but doubles the purchase of oxygen cylinders because the weather forecast indicates that "there may be a hurricane tomorrow" - the market is pricing "uncertainty" with real money.

2. How does volatility affect option prices?

The premium of an option is like a bowl of beef noodles, and volatility is the spoonful of secret chili oil - it does not change the essence of the noodles, but it can completely subvert the taste experience. Taking the BS model as an example, volatility is the only variable in the formula that cannot be directly observed, but it contributes 30%-70% of the value of the option price.

For example, before Nvidia's GTC conference in 2023, the premium for a call option with an exercise price of $900 was $28, of which $12 came from the volatility premium. When Huang Renxun suddenly demonstrated a breakthrough AI chip, the implied volatility soared 18% in a single day, and the price of this option immediately jumped to $47 - equivalent to a premium increase of $1.05 for every 1% jump in volatility. This "volatility leverage" effect makes options a favorite of event-driven traders.

Bitcoin options are like turbocharged sports cars. On the eve of the US approval of the Bitcoin spot ETF, the IV of a $50,000 call option expiring in two weeks reached an astonishing 110%. When Grayscale's sell-off caused price fluctuations, although Bitcoin spot only fell 8%, the collapse of IV caused the value of this option to evaporate by 75%. This reminds us that volatility is a double-edged sword. It can help you soar to the sky, but it can also make you fall freely .

3. Understanding the “emotional code” of volatility

Professional traders look at the volatility curve like meteorologists analyze cloud maps. When the volatility curve of S&P 500 options is "left-skewed" (low-strike put options have higher IV), it means that the market is guarding against black swan risks; while the "right-skewed" pattern suggests that speculators are betting on a bull market.

During the Red Sea crisis, the IV curve of crude oil options showed a rare "double peak" - the IV of the May contract surged to 45%, while the June contract remained stable at 32%. This is like two colliding ocean currents suddenly appearing on the sea: traders believe that the geopolitical conflict will subside within two months, so they buy near-month call options and sell far-month call options at the same time, harvesting time difference profits through "volatility calendar spreads".

The unique "halving cycle law" of the Bitcoin market is even more interesting. Historical data shows that IV is usually 40%-60% higher than HV in the three months before halving, but IV will quickly fall back by 20%-30% within a week after halving. Smart traders follow the same rules as migratory birds: they deploy high IV options in the far month three months before halving, and quickly switch to a selling volatility strategy after the event.

4. Three survival rules for volatility trading

1. Don't use weather forecasts as a guide to action. In the early days of the 2020 mask market, the VIX index hit a historical peak of 85%, and many people frantically bought put options. But the market then rebounded violently under the Fed's monetary easing, and those traders who bet on continued volatility were defeated by the "volatility collapse". This is like stockpiling mineral water during a typhoon - it is a treasure before the disaster comes, but it is useless when the disaster really comes.

2. Beware of the "undercurrents beneath the calm sea" In September 2023, Tesla's stock price was trading sideways at $200-220 for six weeks, and its 30-day HV dropped to a year-low of 22%. When everyone thought the storm was over, Musk suddenly announced a delay in Cybertruck mass production, and IV soared from 28% to 52% overnight, and those low-priced out-of-the-money put options instantly increased in value by 300%. Remember: low volatility may be the market holding back a big move .

3. Learn to "measure the temperature" of volatility . Check the VIX index and Bitcoin volatility cone before the market opens every day. When VIX is below 20 (equivalent to the market's "normal temperature"), be cautious when buying out-of-the-money options; when Bitcoin's quarterly IV exceeds 70% (entering a "high fever state"), give priority to at-the-money contracts. A day trader invented the "volatility temperature difference strategy": when the S&P 500 option IV is 15 percentage points lower than Bitcoin, go long on Bitcoin volatility + short on stock volatility, and the return in two months is 83%.

5. Next Issue Preview

Tomorrow we will explore the Volatility Surface

Homework

1. Find the Bitcoin at-the-money options for the next month on Deribit, record today’s IV value, and compare it with the 30-day HV value.

2. Observe the IV change curve three days before Tesla’s earnings report next week and draw a “volatility” trend chart

3. Practice: When the VIX index is below 18, try to build a sell strangle combination

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