Module 8: Crypto Options
Spreads and Volatility Strategies
Chapter 13 of 14 · about 6 minutes
13.1 Cheaper ways to have a view
Mint expected bitcoin to rise about 10% over the next month, not more. Buying a $100,000 call for $6,284 felt expensive for a moderate move. And Node expected a big move after an upcoming event, but had no idea which direction.
"Can options handle more specific views?" asked Mint.
"That's where they shine," said Hash. "By combining options, you can shape the payoff to match exactly what you expect: a moderate rise, a moderate fall, a big move either way, or no move at all."
13.2 The bull call spread
A bull call spread buys a call at one strike and sells a call at a higher strike, with the same expiry. The sold call reduces the cost, in exchange for capping the maximum profit.
| Leg | Strike | Premium |
|---|---|---|
| Buy 30-day call | $100,000 | Pay $6,284 |
| Sell 30-day call | $110,000 | Receive $2,765 |
| Net cost | $3,519 |
| Value | |
|---|---|
| Maximum loss | $3,519 (if BTC ends at or below $100,000) |
| Maximum profit | $10,000 − $3,519 = $6,481 (if BTC ends at or above $110,000) |
| Break-even | $100,000 + $3,519 = $103,519 |
| BTC at expiry | Bull call spread result | Single $100,000 call result |
|---|---|---|
| $90,000 | −$3,519 | −$6,284 |
| $103,519 | $0 | −$2,765 |
| $110,000 | +$6,481 | +$3,716 |
| $130,000 | +$6,481 | +$23,716 |
If Mint's view of a roughly 10% rise is right, the spread does better than the single call: lower cost, lower break-even, and a better result at $110,000. If bitcoin surges far beyond, the single call wins.
"So I pay less by giving up gains I didn't expect anyway," said Mint.
"Exactly," said Hash. "Spreads let you sell the parts of the payoff you don't believe in."
Spreads also reduce sensitivity to time decay and implied volatility, because the sold option offsets part of the bought option's theta and vega (Chapter 8).
13.3 The bear put spread
The bearish equivalent buys a put and sells a lower-strike put.
| Leg | Strike | Premium |
|---|---|---|
| Buy 30-day put | $100,000 | Pay $6,284 |
| Sell 30-day put | $90,000 | Receive $2,251 |
| Net cost | $4,033 |
| Value | |
|---|---|
| Maximum loss | $4,033 |
| Maximum profit | $10,000 − $4,033 = $5,967 |
| Break-even | $100,000 − $4,033 = $95,967 |
13.4 The long straddle
Node expected a big move but didn't know the direction. A long straddle buys a call and a put at the same strike and expiry, usually at the money.
| Leg | Strike | Premium |
|---|---|---|
| Buy 30-day call | $100,000 | $6,284 |
| Buy 30-day put | $100,000 | $6,284 |
| Total cost | $12,568 |
| Value | |
|---|---|
| Maximum loss | $12,568, if BTC ends exactly at $100,000 |
| Break-even points | $87,432 and $112,568 |
| Profit | Grows as BTC moves further in either direction |
| BTC at expiry | Straddle result |
|---|---|
| $70,000 | +$17,432 |
| $87,432 | $0 |
| $100,000 | −$12,568 |
| $112,568 | $0 |
| $130,000 | +$17,432 |
Bitcoin needs to move more than about 12.6% in either direction by expiry for Node to profit. That's a big hurdle, and it reflects the implied volatility priced into the options. Remember Chapter 6: a straddle bought before an event often suffers volatility crush if the move is smaller than expected.
"So a straddle is a bet that the market is underestimating how much bitcoin will move," said Node.
"That's exactly what it is," said Hash. "Not a bet on direction. A bet on volatility."
13.5 The long strangle
A long strangle is a cheaper version, buying an out-of-the-money call and an out-of-the-money put.
| Leg | Strike | Premium |
|---|---|---|
| Buy 30-day call | $110,000 | $2,765 |
| Buy 30-day put | $90,000 | $2,251 |
| Total cost | $5,016 |
| Value | |
|---|---|
| Maximum loss | $5,016, if BTC ends between $90,000 and $110,000 |
| Break-even points | $84,984 and $115,016 |
The strangle costs less than half as much as the straddle, but needs a larger move to profit.
Chapter 13 · Four strategy payoffs
Four small payoff charts on the same dollar scale, BTC at expiry from $70,000 to $130,000. Bull call spread (buy $100,000 call, sell $110,000 call): maximum loss $3,519, maximum gain $6,481, break-even $103,519. Bear put spread (buy $100,000 put, sell $90,000 put): maximum loss $4,033, maximum gain $5,967, break-even $95,967. Long straddle ($100,000 call and put): maximum loss $12,568 if BTC ends at $100,000, break-evens $87,432 and $112,568, profit growing in either direction. Long strangle ($110,000 call and $90,000 put): maximum loss $5,016 between the strikes, break-evens $84,984 and $115,016.
13.6 Selling volatility
The opposite of buying straddles and strangles is selling them, betting that the market will move less than implied volatility suggests. Short straddles and strangles earn premium and time decay in calm markets.
They're also among the riskiest option strategies. A naked short straddle has unlimited loss potential on the upside and large loss potential on the downside. Crypto's sudden jumps have wiped out many short volatility traders.
A safer version is the iron condor: selling a strangle while buying further out-of-the-money options as protection, which caps the maximum loss. For example, sell the $90,000 put and $110,000 call, and buy the $80,000 put and $120,000 call. The bought options cost premium, reducing income, but define the worst case.
13.7 Strategy map
| Your view | Strategy | Maximum loss | Maximum gain |
|---|---|---|---|
| Strong rise | Long call | Premium | Unlimited |
| Moderate rise | Bull call spread | Net cost | Capped |
| Strong fall | Long put | Premium | Large |
| Moderate fall | Bear put spread | Net cost | Capped |
| Big move, either direction | Long straddle or strangle | Total premium | Large |
| Little movement | Iron condor | Capped by bought wings | Net premium |
| Protect holdings | Protective put or collar | Defined (Chapter 11) | Unlimited or capped |
| Income on holdings | Covered call or cash-secured put | Large, from the holding | Premium (Chapter 12) |
13.8 Costs of multi-leg strategies
Each leg has its own bid-ask spread and fees (Chapter 10). A four-leg strategy pays four spreads to open and potentially four more to close. In less liquid strikes, these costs can eat much of the expected profit. Many venues let you trade multi-leg strategies as a single order, which can reduce execution risk.
13.9 Try it yourself
Using today's BTC options chain for a 30-day expiry, price a bull call spread with strikes at the money and 10% above, and a long straddle at the money. Calculate the maximum loss, maximum gain, and break-even points for each. Then compare the straddle's break-even move with the expected move implied by IV, using the formula from Chapter 6.
Key takeaways from this chapter
- Multi-leg strategies shape payoffs to match specific views.
- Bull call spreads and bear put spreads reduce cost by capping profit, and fit moderate directional views.
- Spreads also reduce sensitivity to time decay and implied volatility.
- Long straddles and strangles profit from big moves in either direction, needing moves larger than implied volatility suggests.
- Selling straddles and strangles earns premium in calm markets but carries large risks; iron condors cap the worst case.
- Choose strategies based on your view of direction, size of move, and volatility.
- Multi-leg strategies multiply bid-ask spreads and fees; check liquidity carefully.