# Laevitas Metric User Guide We have a new refreshed look ! ## 3 Main Levels of Data There are now 3 main levels to navigate data from the top menu, \ **Global | Exchanges | Assets**

## Categorised Markets At every level, you can quickly access the different market data from the left side menu.\ \ For example, \ Global -> Perpetual Swaps\ Exchanges -> Bybit -> Options\ Asset -> Futures -> Bitcoin

## Interconnectivity Stats are now clickable and redirects you to the specific market.

# Metrics Functions The basic Metric has a number of functions which are carefully designed to provide users with the necessary customizations.

# Metrics Layout Settings Metrics Layout Settings can be found in the top right of the page.

Select the metrics and tables that you need, by clicking on the tickbox.

You may choose to view the metrics from the Laevitas Default, 1x1, 2x2 or 3x3 grid view.

# Our Metrics ## Options ## **Model IV** Model IV is Laevitas' volatility surface adapted from Stochastic Volatility Inspired (SVI). ## **Option Chain** An options chain is a listing of all available options contracts for a given security. It shows all listed puts, calls, their expiration, strike prices, and volume and pricing information for a single underlying asset within a given maturity period. The chain will typically be categorized by expiration date and segmented by calls vs. puts. ## **Time and Sales** Time and sales displays volume, price, direction, date, and time data for each trade that is executed on an exchange. **Open Interest & Volume Heatmap** The Open Interest (OI) & Volume Heatmap tool helps to track where positions are concentrated. View current OI and changes in volume and OI by strike, put or call, and expiration. ## **Open Interest & Volume Flow** View buy/sell volume alongside changes in open interest by strike, put or call, and expiration. ## **Open Interest & Volume by Expiration** Call/Put OI and volume (last 24h) breakdown by expiration. ## **Open Interest & Volume by Strike** Call/Put OI and volume(last 24h) breakdown by strike. ## **Max Pain vs Index Price** Historical max pain price of monthly options expiration plotted alongside the index price. ## **OTM (Out-of-the-money) Open Interest by Expiration** Distribution of OTM open interest of calls & puts by expiration. ## **ATM Implied Volatility rolling maturity and by expiration** Historical at-the-money implied volatility on different time periods by rolling maturity or expiration. ## **ATM Implied Volatility Term Structure** View the current at-the-money implied volatilities across expirations, and compare this to one month prior. ## **25Δ (Delta) Skew** Historical 25-Delta Skew values across different time periods by rolling maturity. The 25 Delta Skew is a measure of volatility skew calculated by the following formula (source: Mixon):\ \ Skew 1-month= (IV 25 Delta put 1M – IV 25 Delta call 1M)/ATM IV 1M
## **25Δ Risk Reversal** Historical 25-Delta Risk Reversal values across different time periods by rolling maturity. The risk reversal is another measure of volatility skew. I.E for 1 month it would be computed using this formula:\ \ RR (25-Delta 1M) = IV (25-Delta call 1M) – IV (25-Delta put 1M)\ \ A positive risk reversal means the volatility of calls is greater than the volatility of similar puts, which implies more market participants are betting on a rise in the currency than on a drop, and vice versa if the risk reversal is negative. ## **25Δ Butterfly** Historical 25-Delta Butterfly values across different time periods by rolling maturity. Butterfly is the difference between the average volatility of the call price and put price with the same moneyness level (25-Delta) and the ATM volatility level. For instance a BF 25 could be expressed by the following formula:\ \ BF25 = (σ25C + σ25P) /2 – σATM\ \ Butterfly spreads measure the curvature (kurtosis). The higher the Butterfly spreads, the more ‘peaked’ is your implied volatility curve. ## **Realized Volatility** Historical chart of realised volatility across different time-periods. ## **Volatility Cone** A technique for visualizing current option implied volatility relative to historic volatilities at different maturities. This technique, developed by Galen Burghardt, uses the range of historic volatilities for each option's maturity from, say, one month to two years or longer-depending upon the maturities of instruments available in the market. A historic volatility series is calculated for each period and 25% and 75% confidence intervals on either side of the mean historic volatility line are added. When the current implied volatility term structure is drawn on this diagram, the investor is able to determine how current option premiums compare to historic premium levels at various maturities. # Alerts Laevitas Alerts helps you stay updated on the latest moves in the crypto derivatives market. ### Setting Up Your First Alert There are two main ways to create alerts. 1\. Creating from [Alerts Page](https://app.laevitas.ch/alerts)\ In the Alerts Page, you can create and manage its activity and alert logs.

Create a new Alert directly via the Alerts Page.

2\. Creating from Tables\ On applicable tables, alerts can be set by pressing the Bell icon.

Click on the Bell icon to create an Alert on the Asset and Ticker.

Choose from either Assets or Exchanges.

Set your **Condition** and **Value**, **Alert Frequency**, and choose your **Alert Channels**.

### Setting Up Telegram 1. Press Create Channel and Select Telegram. 2. Invite the Laevitas Bot by clicking [@LV\_Alert\_bot](https://t.me/LV_Alert_bot) 3. Start the Laevitas Bot

Initiate the Laevitas Telegram Bot by pressing Start.

4. Paste the replied code from the bot to the Alert Setup to verify.

Copy the code and paste into the Alert Setup field.

### Setting Up Email 1. Enter your email address to receive the code. 2. Copy and Paste the received code to create the email channel.

### Setting Up Discord 1. Make sure you have turned on **Allowed Direct Messages from server members** in order for the connection process to be initiated.

2. Join Laevitas' [Discord server](https://discord.gg/VGz6xxNWa3) to verify.\ ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FDJ6T6dc4YdRzL692AFdE%2Fimage.png?alt=media\&token=bd240c81-54b9-4886-9427-50bfb0501c5b) 3. Key in your Discord Username. 4. Select your Discord Account.\ ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F7C09rZ2cSKfFlhithYHI%2Fimage.png?alt=media\&token=a1e32d7d-d6ae-4d15-b398-237f0876fb17) 5. Copy and Paste the verification code to verify the Discord Bot.

# Tool Guides # Spread Analysis # Guide ## Inputs Configuration In this section, we will guide you through the process of setting up the inputs for the spread tool. This includes specifying the contracts, metrics, and attributes you would like to analyze.

***Assets and Attributes*** (Red zone): Select the following to compare between 2 assets, * **Metric** * **Exchange** * **Asset** * **Attribute** **Style and Time Horizon** (Yellow zone): This panel shows the selection of the following inputs. * **Period** - The time period beginning since the Start Date. * **Start Date** - Start date of the analysis. * **Function** - Product, Sum, Spread or Ratio between the two assets' metric. **Summary** (Green zone): This panel displays a summary of all inputs. ## Spread Results This section contains the results from the spread calculation. These include charts detailing time series data on the inputs as well as the spread simulation. In addition, statistical data from distribution to correlation and regression are available.

This first chart shows the evolution of the selected assets over the selected period with the y-axis values for the first asset represented on the left and the y-axis values for the second asset represented on the right.

Figure 2 : Spread simulation and distribution

* **Left panel** (Red zone): Primary statistics such as mean, std and more are displayed here * **Middle panel** (Yellow zone): This chart displays the spread output. In addition to the absolute value of the spread, users can overlay the Simple Moving Average (SMA) and Exponential Moving Average (EMA).These indicators located below the graph indicate the name and color of each curve, allowing the user to hide or display a curve by clicking on the name of the corresponding indicator * **Right panel** (Green zone): This simulation shows the distribution of the spread values which is found in the first graph with the green indicator.

Figure 4: Regression Simulation and Statistics

* **Left panel** (Red zone): This figure represents the regression simulation. The x-axis contains the values of asset number 1 and the y-axis represents the second asset. The regression curve is displayed with a green line that represents the trend of the evolution of the two selected assets over the period. The red dots indicate the actual values observed for each asset. * **Right panel** (Green zone): The regression statistics can be found here.

Figure 5: Simulation and Correlation Distribution

* **Left panel** (Red zone): This simulation shows the correlation over the duration of the spread. The curve changes from red to green, with red indicating a value close to zero and green indicating a value close to one. * **Right panel** (Green zone): This histogram displays the distribution of the correlation. # Concepts ## Understanding the essential Metrics and Attributes for Effective Spread Analysis In this section, we will provide a comprehensive overview of the key concepts that are relevant to using the spread tool. This includes defining the various metrics and explaining the various attributes, that are used in spread analysis. By the end of this section, you will have a solid understanding of the underlying concepts and terms that are essential for effective spread analysis. ## Contracts Options, futures, and perpetual contracts are all financial instruments that allow investors to hedge against future price risks. **Options contracts** : these give the right, but not the obligation, to buy or sell an asset at a specified price at a predetermined future date. Options are commonly used to hedge against future price risks and can be bought or sold on an exchange. Options contracts have daily, weekly, monthly, or quarterly expiration dates. Delta, Vega, Theta, and Gamma are commonly used terms to describe the characteristics of an option contract and the associated risks. Here is a brief description of each term. * **Delta**: The Delta is a measure of the sensitivity of an option contract to the price of the underlying asset. A positive delta indicates that the option price will increase if the price of the underlying asset increases, while a negative delta indicates that the option price will decrease if the price of the underlying asset increases. * **Vega**: It is a measure of the sensitivity of an option contract to changes in the volatility of the underlying asset. A positive vega indicates that the option price will increase if the volatility of the underlying asset increases, while a negative vega indicates that the option price will decrease if the volatility of the underlying asset increases. * **Theta**: It is a measure of the sensitivity of an option contract to the passage of time. As the time remaining until the option expiration decreases, the theta will be higher. A positive theta indicates that the price of the option will decrease as time goes by, while a negative theta indicates that the price of the option will increase as time goes by. * **Gamma**: is the measure of sensitivity of an option contract's delta to the price of the underlying asset. A positive gamma indicates that the delta will increase as the price of the underlying asset increases, while a negative gamma indicates that the delta will decrease as the price of the underlying asset increases. **Perpetual contracts** : also known as non-expiring perpetual contracts, are contracts that don't have a specified expiration date. They are typically used to trade assets that are not easily traded or for which there are no standard futures contracts. Perpetual contracts are traded on an over-the-counter (OTC) market and can be more difficult to buy or sell. **Future contracts** : These are contracts that fix the terms of the purchase or sale of an asset at a specified future date. They are typically used to mitigate future price risks and allow investors to hedge their positions. The difference between futures contracts and options contracts is the obligation to exchange the asset at a fixed price before the expiration date. ## Strategies **25 delta Butterfly** : The 25 delta butterfly is a specific type of butterfly spread that involves options with delta values close to 25. The delta value measures the sensitivity of an option's price to changes in the underlying asset's price. In this strategy, four options contracts with the same expiration but three different strike prices are used: a higher strike price, an at-the-money strike price, and a lower strike price. The 25 delta butterfly combines both a bull and bear spread and is a neutral strategy. It is used to take advantage of small price movements in the underlying asset and to potentially profit from a limited range of price movement. **25 delta Skew** : The 25 delta skew measures the price of a call option with a delta of 0.25 and the price of a put option that has a delta of 0.25. If the skew increases then puts are becoming more expensive than calls; if the skew decreases, call premiums are going up against puts premiums. **Risk reversal** : A Risk Reversal is an option combo trade that consists of selling (that is, being short) an out-of-the-money Put and buying (i.e. being long) an out-of-the-money call, with both options expiring on the same expiration date. ## Volatility The volatility measures the amplitude of movements of an underlying asset (up or down) **Historical Volatility** : It is based on past data of an underlying asset and is calculated using the historical record of the underlying asset's price evolution. It cannot predict future variations. **Implied Volatility** : Each asset has a level of risk that is to be correlated with its profitability. Implied volatility evaluates the evolution of this risk over time and therefore determines the future profitability of the security. The higher the implied volatility, the greater the risk. In return, the expectation of gain is stronger. Implied volatility is expressed as a percentage. There are several models for calculating implied volatility, such as Black & Scholes. The higher the implied volatility, the higher the premium paid by investors to buy the option. Three factors that influence the level of implied volatility are the option maturity, the option price, and the risk-free rate. **Realized Volatility** : Realized volatility is a measure of the observed variability of a financial asset over a given period. It is calculated by using the historical price data of the asset to estimate the standard deviation of the asset's returns over a specific time period. It is important to note that realized volatility is based on past price data and therefore cannot accurately predict future volatility. ## Other Stats **Open interest :** The total number of open derivative contracts, such as options or futures contracts that have not settled (opened, but have not been closed, expired or exercised). Open interest is equal to the total number of contracts bought or sold, not the total of the two added together. Open interest decreases when buyers (or holders) and sellers (or issuers) of contracts close more positions than were opened that day. **Moving Average :** is an indicator that serves to smooth price data by creating a constantly updated average price. A simple moving average (SMA) is a calculation that takes the arithmetic mean of a given set of prices over a specific number of days in the past. An exponential moving average (EMA) is a weighted average that places greater emphasis on a stock's price over the past few days, making it a more sensitive indicator to new information. **Value at Risk :** the value at Risk (VaR) is a measure of the maximum possible loss in value of an asset or a portfolio of financial assets over a given period of time with a certain probability. **Confidence Interval :** It is an interval of values which is estimated from statistical data and which contains a certain probability of containing the true value of a parameter. **Standard deviation and variance :** They are measures of the dispersion of values in a data set. They indicate how scattered the values of a data set are around the mean. The standard deviation is the square root of the variance. **ATM IV :** Stands for "At-The-Money Implied Volatility". It refers to the implied volatility of a financial instrument (such as a stock option) that is currently trading at the same price as the underlying asset. In other words, it is the expected volatility of a stock option whose strike price is equal to the current price of the underlying stock. ATM IV is an important metric in options trading as it provides a baseline for pricing options and determining their relative value. **Mean :** The mean is a measure of central tendency that indicates the mean value of a set of data. **Median :** The median is also a measure of central tendency, but is used when data is ordered ascending or descending. To find the median, you must first rank the data ascending or descending, then find the middle item. **Quartiles :** These are three values that separate a set of data placed in ascending order into four subsets comprising exactly the same number of data. They are used to give an idea of the distribution of data in a set. **Z-Score :** corresponds to the number of standard deviations separating a result from the mean. # Features and Benefits ### Spread Analysis: A Powerful Trading Tool☝️ The spread analysis tool can be used to perform basic operations, such as addition, subtraction, and multiplication, between different metrics with multiple attributes. This can be useful for evaluating the risks and opportunities associated with spreads and for aiding in the decision-making process. Applications of this tool can include: * **Spread history**: This can help you understand how the relationship between assets has evolved over time and help identify trends or seasonal behaviours. * **Asset correlation**: By measuring the correlation you can assess the degree to which different assets move in coordination with one another. * **Z-score**: The Z-score can help you understand if the spread between assets is abnormally high or not on a relative basis compared to its average standard deviation. Highlighting potential deviations and therefore opportunities. * **Spread distribution**: This output allows users to visualise the absolute spread relative to its distribution over a period thus detailing whether price action is sitting comfortably around its mean or drifting towards the tails. * **Regression**: Used to identify hidden trends or hidden relationships between spread attributes. # Strategy Backtester Ever wanted to know the performance of an option strategy over time? This tool is designed to help you backtest option strategies and evaluate their performance. ### Inputs

***Currency***\ Choose the asset you want to backtest. Currently only BTC and ETH is available. ***Frequency***\ Choose the frequency which the option strategies will be opened and closed. Each new strategy will open after the previous one is closed. ***Year To Date***\ Backtest from the start of the current year. ***No. of Trades***\ Input the number of trades to be backtested. ***Starting Capital***\ Select the type of starting capital and input the amount of starting capital.\ NOTE: If $ is selected, the Backtester will assume Portfolio as USD-margined and settled instead of the crypto asset. ### **Strategies** Select one of the option strategy icons to start backtest.

### Strategy Leg Input Select the Direction, Type, Delta and Size of the individual legs. For certain strategies, the Direction and Type of the legs is pre-fixed and cannot be changed.

## Backtest Results Results are presented in 3 sections. ### 1. Portfolio Equity Curve The performance of the strategy is shown as Portfolio Value, in terms of the underlying asset (BTC/ ETH) or in USD. \ \ The Index Price may be toggled into the chart display against the portfolio performance.

### 2. P/L Stats More details of the porfolio performance is shown here.

### 3. Trade Log Settled and Unsettled Positions are tabled here with their respective P/L and resulting Portfolio Value effect.

# Calculator # Glossary ## **Annualised Basis** The nominal basis between a futures contract and spot price can be converted into an annual percentage difference, by dividing by the time to expiry of the contract expressed in years.\ \ Annualised Basis = (Future Price/Spot Price - 1)/Time To Expiry ## **At-The-Money (ATM)** At the money (ATM) are calls and puts whose strike price is at or very near to the current market price of the underlying asset. ## **Basis** The difference between the futures price and the spot price of the same asset. Basis can be calculated to the near future, and may represent different time periods. The below calculation expresses basis as a nominal value:\ \ Basis (B) = Future Price (F) - Spot Price (S) ## **Backwardation** A market in backwardation occurs when the forward price of the futures contract is lower than the spot price. This generates a downward sloping forward, or inverted, curve which is in backwardation. Volatility in backwardation is a signal that investors expect more volatility in the near-term. ## **Block Trade** Block Trades are privately negotiated trades in futures, options, or a combination of multiple thereof. ## **Butterfly (BF)** A butterfly is a limited risk, non-directional options strategy that is designed to have a high probability of earning a limited profit when the future volatility of the underlying asset is expected to be lower (when long the butterfly) or higher (when short the butterfly) than that asset's current implied volatility. It is a neutral option strategy that uses four call options contracts with the same expiration but three different strikes. ## **Call** Calls give the buyer the right, but not the obligation, to buy the underlying asset at the strike price specified in the option contract. Investors buy calls when they believe the price of the underlying asset will increase and sell calls if they believe it will decrease. ## **Contango** A market is in contango when the futures contracts are trading at a premium to the spot price. When the spot price is lower than the futures price which has generated an upward sloping forward curve. Volatility is normally in contango. Contango is the options and futures market way of saying that volatility further out in time is higher than volatility in the near-term. ## **Delta** Delta (Δ) represents the rate of change between the option's price and a $1 change in the underlying asset's price. In other words, the price sensitivity of the option is relative to the underlying asset. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. ## **Expiry** Expiration date for derivatives is the final date on which the derivative (options or futures) is valid. After that time, the contract has expired. ## **Funding** Funding consists of regular payments between buyers and sellers, according to the current funding rate. When the funding rate is above zero (positive), traders that are long (contract buyers) have to pay the ones that are short (contract sellers). In contrast, a negative funding rate means that short positions pay longs. The funding rate is based on two components: the interest rate and the premium. The interest rate may change from one exchange to another, and the premium varies according to the price difference between futures and spot markets. ## **Futures contract** Futures contracts are financial derivatives that oblige the buyer to purchase some underlying asset (or the seller to sell that asset) at a predetermined future price and date. ## **Gamma** Gamma (Γ) represents the rate of change between an option's delta and the underlying asset's price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. ## Gamma Bands Gamma bands is a calculation of probability on the underlying asset price of a 1 standard deviation move by using options at-the-money implied volatility. Calculation methodology on the link below (source: Macrohedged):\ \ [ Gamma Bands](https://www.youtube.com/watch?v=YcWrkXuaBgc\&list=PLuMyCuTkEGYkkDL_KhEFA95GGXmo2GNTJ\&index=4) ## **Greeks** "Greeks" is a term used in the options market to describe the different dimensions of risk involved in taking an options position. These variables are called Greeks because they are typically associated with Greek symbols. ## **Implied Volatility** Implied volatility is the market's forecast of a likely movement in a security's price. It is a metric used by investors to estimate future fluctuations (volatility) of a security's price based on certain predictive factors. Implied volatility, denoted by the symbol σ (sigma), can often be thought to be a proxy of market risk. It is commonly expressed using percentages and standard deviations over a specified time horizon. ## **In-The-Money (ITM)** "In the money" (ITM) is an expression that refers to an option that possesses intrinsic value. ITM thus indicates that an option has value in a strike price that is favorable in comparison to the prevailing market price of the underlying asset: * An in-the-money call option means the option holder has the opportunity to buy the security below its current market price. * An in-the-money put option means the option holder can sell the security above its current market price. ## IV Rank Implied volatility rank (IV rank) compares an underlying’s current IV to its IV range over the past one year. An IV rank of 25% means that the difference between the current IV and the low IV is only 25% of the entire IV range over the past year, which means the current IV is closer to the low end of historical volatility. Furthermore, an IV rank of 0% indicates that the current IV is the very bottom of the one-year range, and an IV rank of 100% indicates that the current IV is at the top of the one-year range. ## RV Rank Historical volatility rank (RV rank) compares an underlying’s current RV to its RV range over the past one year. An RV rank of 25% means that the difference between the current RV and the low RV is only 25% of the entire RV range over the past year, which means the current RV is closer to the low end of historical volatility. Furthermore, an RV rank of 0% indicates that the current RV is the very bottom of the one-year range, and an RV rank of 100% indicates that the current RV is at the top of the one-year range. ## **Mark Price** The mark price is an estimate of the true value of a contract (fair price) when compared to its actual trading price (last price). ## **Open Interest** Open interest is the total number of outstanding derivative contracts, such as options or futures that have not been settled. ## **Options contract** An option is a derivative, a contract that gives the buyer the right, but not the obligation, to buy or sell the underlying asset by a certain date (expiration date) at a specified price (strike price). ## **Perpetual contract** A perpetual contract is a special type of futures contract, but unlike the traditional form of futures, it doesn’t have an expiry date. So one can hold a position for as long as they like. Other than that, the trading of perpetual contracts is based on an underlying Index Price. The Index Price consists of the average price of an asset, according to major spot markets and their relative trading volume. ## **Put** Puts give the buyer the right, but not the obligation, to sell the underlying asset at the strike price specified in the contract. The writer (seller) of the put option is obligated to buy the asset if the put buyer exercises their option. Investors buy puts when they believe the price of the underlying asset will decrease and sell puts if they believe it will increase. ## **Out-The-Money (OTM)** A term used to describe an option that has no intrinsic value. A call option with a strike price higher (or a put with a strike price lower) than the current market value of the underlying asset. ## **Realised Volatility** Sometimes referred to as the historical volatility, this term usually used in the context of derivatives. While the implied volatility refers to the market's assessment of future volatility, the realized volatility measures what actually happened in the past. Volatility measures the variability of returns of an underlying asset and in some sense provides a measure of the risk of holding that underlying. Below is one method to calculate it: Annualised standard deviation of daily (log) returns calculated from a data set over some fixed period of time. ## **Risk reversal (RR)** A risk reversal is an option strategy that combines the purchase of OTM calls with the sale of OTM puts, similar deltas and same expiration. It can be used as a measure of volatility skew. ## **Term Structure** Futures term structure is the prices of futures contracts on a single underlying asset over all available expiration months. \ \ The term structure of volatility is the curve depicting the differing implied volatilities of options with the same strike price but different maturities. ## **Theta** Theta (Θ) represents the rate of change between the option price and time, or time sensitivity - sometimes known as an option's time decay. Theta indicates the amount an option's price would decrease as the time to expiration decreases, all else equal. ## **Underlying** Underlying asset are the financial assets upon which a derivative’s price is based. ## **Vega** Vega (v) represents the rate of change between an option's value and the underlying asset's implied volatility. This is the option's sensitivity to volatility. Vega indicates the amount an option's price changes given a 1% change in implied volatility. ## **Volatility Skew (Smile)** The volatility skew is the difference in implied volatility (IV) between out-of-the-money options, at-the-money options, and in-the-money options. The volatility skew, which is affected by sentiment and the supply and demand relationship of particular options in the market, provides information on whether fund managers prefer to write calls or puts. ## **Volatility Surface** Combining the ATM term structure of volatility and the skew per expiry date, will render a 3 dimensional graph (time to expiry versus strike versus volatility). This is known as the volatility surface. ## **Volume** The number of contracts in futures or options on futures transacted during a specified period of time, often over the course of a day. # Contracts {% hint style="info" %} Contracts are a term of reference describing a unit of trading for a future or options. {% endhint %} ### In Futures 1. In futures trading, the contract is an agreement between two parties to make and take delivery of a specified commodity on a given date at a predetermined location. ### In Options 1. In options trading, the contract an agreement by the writer either to buy (if a put) or to sell (if a call) a given asset at a predetermined price until a certain date. The holder of the option is under no obligation to act. 2. In crypto options, one contract usually means the option corresponding to 1 unit of the underlying (e.g 1 BTC or 1 ETH) as compared to 100 shares in 1 equity option. # Premium (Option) {% hint style="info" %} Option premium is the price that buyers pay for a put or call options contract to the seller.\ It is also the market (best) price of the option contract. {% endhint %} ### What Affects Premium ? The main factors affecting an option's price are as follows. #### 1. Underlying security's price As the price of the underlying security changes, the option premium changes. An increase in the underlying price will increase call option premium, while a fall in underlying price will increase put option premium. #### **2. Moneyness** The moneyness directly affects the option's premium because it indicates how far away the underlying security price is from the specified strike price. ![BTC Orderbook from Deribit](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FIYKBZc7eye3EL7lc78Cz%2Fimage.png?alt=media\&token=e10d0404-488f-4cbf-bdac-f50f5e0ca773) As an option becomes further in-the-money, the option's premium normally increases. Conversely, the option premium decreases as the option becomes further out-of-the-money. For example, as an option becomes further out-of-the-money, the option premium loses intrinsic value, and the value stems primarily from the time value. #### 3. Remaining life of the option (Days to Expiration) The premium of an option also largely derives from its time value, its days till expiration. Further dated options are more expensive than near dated ones with the same strike price. This is because sellers need to be sufficiently compensated for the exposure when underwriting the option since they are locked in for a longer period. #### 4. Volatility The price of the option is directly related to the market's perception of the underlying's volatility. If the market expects high volatility, option prices will be high, as there is increased level uncertainty as to where the price might settle at expiration. If the market expects low volatility, option prices will be low. # Notional {% hint style="info" %} The notional value refers the total value of the derivative contract it holds and calculated by multiplying the total number of units that are there in the contract with the spot price of the said units prevailing in the market. \ **Notional Value = Total Units in the Contract \* Spot Price** {% endhint %} For example,

Ticker	Index Price	USD (24h Volume)	Notional (24h Volume)
BTCUSDT	$20,000	$14,000,000,000	700,000
ETHUSDT	$1,000	$5,000,000,000	500,000,000

# Volume {% hint style="info" %} **Volume denotes the number of options or futures that are traded.** There are separate volume figures for options and for futures. {% endhint %} ### **How Volume Is Calculated** Volume accounts for opening and closing transactions. When options are bought or sold, it **adds** to the volume traded for the day. ### ### **Difference between Volume and Open Interest** For example, If an option buyer goes to the market and buys 200 call options, the volume for the day is 200 and the Open Interest becomes 200 as well. If in the same day, a new seller goes to the market and sells 150 put options, the total volume for the day is 350 and the Open Interest becomes 350. If before the end of the day, both the buyer (sell to close) and the seller (buy to close), the volume added will be 350 from the buyer (+200) and seller (+150). Total volume becomes 400+350 = 750. Since there are no longer any opened and not yet closed positions, Open Interest therefore becomes 0 as far as these two market participants are concerned. ### **Why Volume Matters** The more an option or derivative is being traded, the more buyers and sellers there are, which usually results in tighter bid-ask spreads. The more activity there is, the more we can assume there is an agreement on a fair price. Related Metrics:\ [Global Perps Volume](https://app.laevitas.ch/details/gm_volume?variant=Volume\&subInfo=c)\ [Global Futures Volume](https://app.laevitas.ch/details/gm_volume_future?variant=Volume\&subInfo=c\&type=future)\ [Global Options Volume](https://app.laevitas.ch/details/global_HoiBreakDownByCurrency?variant=oi) # Open Interest {% hint style="info" %} **Open interest (OI) denotes the number of options or futures that are opened and not closed out yet.** There are separate OI for options and for futures. {% endhint %} ### **How Open Interest Is Calculated** When options are bought or sold **TO OPEN**, it **increases** the OI. When options are bought or sold **TO CLOSE**, it **reduces** the OI. ### **Difference between Open Interest and Volume** For example, If an option buyer goes to the market and buys 200 call options, the volume for the day is 200 and **the Open Interest becomes 200 as well.** If in the same day, a new seller goes to the market and sells 150 put options, the total volume for the day is 350 and **the Open Interest becomes 350.** If before the end of the day, both the buyer (sell to close) and the seller (buy to close), the volume added will be 350 from the buyer (+200) and seller (+150). Total volume becomes 400+350 = 750. Since there are no longer any opened and not yet closed positions, **Open Interest therefore becomes 0** as far as these two market participants are concerned. ### **Why Open Interest Matters** OI helps to give a clue on what orders traders are initiating, and the general activity of the futures/ options market. But using Open Interest alone is not enough. It is also necessary to take a detailed look into the volume of the exact orders to have a better sensing of the sentiment of the market.
Related Metrics: [Global Perps OI](https://app.laevitas.ch/details/gm_oi?variant=OI\&subInfo=c\&type=perpetual)\ [Global Futures OI](https://app.laevitas.ch/details/gm_oi_future?variant=OI\&subInfo=c\&type=future)\ [Global Options OI](https://app.laevitas.ch/details/global_HoiBreakDownByCurrency?variant=oi) # Implied Volatility {% hint style="info" %} **Implied volatility** refers to the one standard deviation range of expected movement of the underlying’s price over the course of a year. {% endhint %} #### **Implied Volatility (IV)** It is the one standard deviation range of expected movement of the underlying’s price over the course of a year. For example, if Bitcoin has an implied volatility of 50% and it is currently trading at $50,000, it is expected to move between ±50% of the current price over the course of a year, or range between $25,000 and $75,000 with a 68.2% probability of accuracy (1 standard deviation). ### **Implied Volatility as a Normalized Measure** For options traders, it is crucial to know if an option is cheap or expensive relatively to those with a different strike price or expiration. ![(BTC Option Orderbook from Deribit)](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FQt0lsuhjDWoRzE2vAfHs%2Fimage.png?alt=media\&token=d7911d7c-4faa-4ca7-9f14-251ba3bb08e8) **Implied volatility is derived from options prices, so changes in options prices affect IV. Not the other way around.** By just looking at the dollar cost of an option it would be quite difficult to tell if it was relatively cheap or expensive as there are several other variables that affect an option’s price other than just the current price of the underlying asset. Since the implied volatility figure for each option is annualised (a.k.a normalised), a comparison can be made between options from different expiry dates. ### **Different Time Periods, Fairly Annualized** Some metrics in Laevitas provide IV in different time periods (7, 30, 60, 90, 180, 365 Days). ![BTC ATM Implied Volatility (Laevitas)](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fq3vDzknZhXMO5ryUzJcU%2Fimage.png?alt=media\&token=5efcd479-a780-446b-96bd-34db6045639a) In the above chart, IV 7 Days show the Implied Volatility of At-The-Money(ATM) option over the past 7 days as an annualized figure, at 160.731%. This is useful to help understand the state of implied volatility in comparison for this time period with another time period, say, the past 30 days which stands at 129.299%. In other words, on 12th May, the past 7 days has been “more volatile” than in the past 30 days. ### **IV Plays** Implied Volatility of the option itself is an useful normalized value which helps identify cheap option buying or lucrative option selling opportunities. High IV environments allow traders to collect more premium, or move strikes further away from the underlying price and still collect a decent premium for short options strategies. Low IV environments allow traders to speculate on long premium directional strategies at a lower cost than they would have to pay in a high IV environment, due to the lower extrinsic value and expected moves across the board. ### **Does IV of more than 100% mean that the price may go below $0?** In traditional finance, volatility is usually measured and quoted in **percent annualized.** Instead of looking at IV as a definitive percentage movement of the stock, it should be used as a measured comparison of volatility in its original intended meaning. # Realized Volatility {% hint style="info" %} **Realized Volatility** is the actual movement that occurs in a given underlying over a defined past period. {% endhint %} Sometimes referred to as the historical volatility, this term usually used in the context of derivatives. While the implied volatility refers to the market's assessment of future volatility, the realized volatility measures what actually happened in the past. One method to calculate it: Annualised standard deviation of daily (log) returns calculated from a data set over a specified fixed period of time. # Funding Rate {% hint style="info" %} **Funding is a payment made from one side of the trade (long or short) to the other.**\ Negative Funding Rate: Short perpetual positions pay longs. \ Positive Funding Rate: Long perpetual positions pay shorts. {% endhint %} ### What is Funding Rate Funding is a payment made from one side of the trade (long or short) to the other. When the funding rate is negative, shorts pay longs, when funding is positive longs pay shorts. When the price of the perpetual swap is lower than the index, then in order to strengthen demand for longs and subsequently encourage the price to increase towards the index, longs are paid funding by shorts (negative funding). This has the effect of decreasing demand for shorts and increasing demand for longs until the price approaches the index again. Conversely, when the price of the perpetual swap is higher than the index, then in order to strengthen demand for shorts and subsequently encourage the price to fall towards the index, shorts are paid funding by longs (positive funding). This has the effect of decreasing demand for longs and increasing demand for shorts until the price reaches the price of the index. ### **Why Funding Rate Exists** The funding mechanism serves to keep the Perpetual price in the exchange in line with the spot prices. Unlike conventional futures, perpetual futures traders can hold positions without an expiry date and do not need to keep track of various delivery months. For instance, a trader can keep a short position to perpetuity unless he gets liquidated. As a result, trading perpetual contracts are very similar to trading pairs on the spot market. Since perpetual futures contracts never settle in the traditional sense, exchanges need a mechanism to ensure that futures prices and index prices converge on a regular basis. This mechanism is also known as Funding Rate. ### Zero Sum Game Funding is a zero sum game, where longs receive all funding from shorts, or shorts receive all funding from longs.\ The further away from the index the price of the perpetual gets, the larger the funding rate becomes. Some exchanges expressed their perpetual funding rate as per 8-hour interest rate. The funding rate is based on two components: the interest rate and the premium. The interest rate may change from one exchange to another, and the premium varies according to the price difference between futures and spot markets. ### Interpreting Funding Rate While not imperative, Funding Rate is an indicator for the market sentiment or willingness to stay biased in direction. * **> 0 (Positive rates)**: **Overall Long Sentiment** Positive funding rates indicate that long perpetual traders are dominant and are willing to pay funding to short traders. Positive funding rates imply that many traders are bullish. * **< 0 (Negative rates)**: **Overall Short Sentiment** Negative funding rates indicate that short perpetual traders are dominant and are willing to pay to long traders. Negative funding rates imply that many traders are bearish. # Volatility Skew {% hint style="info" %} The Volatility Skew is a pattern of implied volatility for options that have the same underlying, the same expiration date but different strike prices. {% endhint %} ### What is Volatility Skew Different strikes of the same expiration often trade at different implied volatilities, depending on market conditions. The Volatility Skew pattern can be observed by plotting implied volatilities against strike prices. ### Different Skew Patterns The Black-Scholes Model (BSM) predicts that the implied volatility curve is flat when plotted against varying strike prices. Theoretically, it would be expected that the implied volatility would be the same for all options expiring on the same date with the same underlying asset, regardless of the strike price. Yet, in the real world, this is not the case. Skew occurs when there is imbalance in demand for options that are in-the-money or out-of-the-money as opposed to those at-the-money. ### No Skew ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FET4T0l5RFKwBR3aJraNn%2Fimage.png?alt=media\&token=d56e4e75-e19f-41b4-aa77-b5bada787376) When there is no skew, the Implied Volatility forms a "smile" pattern with the shape that it makes, indicating that out-of-the-money Puts and Calls are more volatile and "expensive" than at-the-money options. The high demand for options that are further in-the-money (ITM) or out-of-the-money (OTM) are be reflected in higher implied volatility at the far left and far right of the curve. A Volatility "Smile" implies that the market are betting on big moves in the underlying asset. ### Normal/ Reverse Skew ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FQGiF7fX4Sy89j4Lz7PHY%2Fimage.png?alt=media\&token=21473b6e-6b3d-4249-aa03-9f1984f8216f) Generally Normal or Reverse Skew is the base case for a normal performing market where traders are expecting a stock to fall (or at least there is a heightened risk of it doing so). This volatility "smirk" is often seen in out-of-the-money puts and in-the-money calls being more volatile and "expensive". ### Forward Skew ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FoLPFfu7CoF8CoB0HbECZ%2Fimage.png?alt=media\&token=bf99ada0-87ce-497e-865c-fde89e02c61d) Forward skew is typically observed when the market perceives more risk to the upside in the asset, as compared to the downside. In this case the implied volatility at the higher strikes is greater than those at the lower strikes. This means that OTM calls and ITM puts would be in greater demand than OTM puts and ITM calls. Forward options skew is common in some commodities markets, especially when a lack of supply is expected to drive up the commodity prices. #### Related: [Read here about 10Δ 25Δ Skew/ Risk Reversal metric.](/laevitas-metrics/10d-25d-skew-risk-reversal) # Term Structure {% hint style="info" %} Term Structure of volatility is the characteristic differences in implied volatility between options of different expirations. {% endhint %} ### The Term Structure of Volatility In addition to the volatility smile, options of different maturities also display characteristic differences in implied volatility. This is referred to as the Term Structure of volatility. ### What Affects Term Structure A few things affect the term structure of volatility. The main effect relates to the implied impact of upcoming market or project events. Anticipated events such as forks, burn and unlocking events can further distort the term structure so that implied volatility is significantly higher for one expiration than another. These distortions disappear after the event has passed. For example, a BTC option maturing after Bitcoin's halving event would be expected to have higher implied volatility than one expiring right before such a milestone event, as there are price uncertainty thereafter. Volatility tends to compress the shape of the smile curve as the maturity date increases.\ \ There isn’t necessarily a “standard” term structure of volatility, but there are four common ones. ### 1. Humped ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F5ld7q3tiBR0LOm5JoV8B%2Fimage.png?alt=media\&token=984db3a9-770c-4fe2-acc2-01e928ce5ded) ### 2. Downsloping If short-dated options have unusually high implied volatility, the term structure on that underlying will likely be a declining curve. This means there is lower implied volatility for longer-dated options. ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fp56U0W0c98YKU61NGUBT%2Fimage.png?alt=media\&token=c3b74749-95a8-412b-9c72-4382a8f68295) ### 3. Upsloping Conversely, if the implied volatility is unusually high for options on an underlying, the term structure will likely be rising, meaning there is higher implied volatility for longer-dated options. ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FTwwyLEPXhemxmEypIGuq%2Fimage.png?alt=media\&token=11ae77c8-351f-44b5-9fac-fba5514caaac) ### 4. Flat Flat term structure is rare as it says that near-term and far-term implied volatilities are equal. This mainly occurs in interest rates, which generally indicates that investors are unsure about future economic growth and inflation. ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FsgtN2yHxT3iRRDh1rGJz%2Fimage.png?alt=media\&token=40ddfe63-f783-4e0d-a082-d8861b8ff6f4) ### What's Important It is important to distinguish between the volatility smile and the term structure of volatility, which measures the effect of time on implied volatility. By having a good understanding of Term Structure, volatility traders can execute the most suitable trades to take advantage of the volatile (or lack of) crypto markets. Related Metrics:\ [ATM IV Term Structure (All Exchanges)](https://app.laevitas.ch/details/global_atm_iv_ts?market=aggregate) ### # Backwardation {% hint style="info" %} A market in backwardation occurs when the forward price of the futures contract is lower than the spot price (negative basis). \ This generates a downward sloping forward, or inverted, curve which is in backwardation. \ Volatility in backwardation is a signal that investors expect more volatility in the near-term. {% endhint %} ### Original Definition of Backwardation The precise definition is not just an inverted curve, but it is actually the theory of normal backwardation. The definition came from economist John Maynard Keynes through his book *In Treatise on Money* (1930, chapter 29). "Normal backwardation" occurs when the sellers are willing to sell in the future at a discount to the expected price because of the volatility, so that they could lock in their price. ### **Negative Basis** When backwardation occurs, there is negative basis whereby the futures price is lower than the current spot price. Basis is the difference between the futures price and the spot price of the same asset. Basis can be calculated to the near future, and may represent different time periods. The below calculation expresses basis as a nominal value:\ \ Basis (B) = Future Price (F) - Spot Price (S) ### What Does Backwardation Points To ? When the basis turns negative (backwardation), this is an alarming, bearish red flag in the market. In contrast, a 5%–15% annualized premium is expected in healthy markets, a situation which is known as Contango. \ Read more about Contango here. # Contango {% hint style="info" %} A market is in contango when the futures contracts are trading at a premium to the spot price. When the spot price is lower than the futures price, it generates an upward sloping forward curve. Volatility is normally in contango. Contango is the options and futures market way of saying that volatility further out in time is higher than volatility in the near-term. {% endhint %} ### Positive Basis When contango occurs, there is positive basis whereby the futures price is higher than the current spot price. Basis is the difference between the futures price and the spot price of the same asset. Basis can be calculated to the near future, and may represent different time periods. The below calculation expresses basis as a nominal value:\ \ Basis (B) = Future Price (F) - Spot Price (S) In a healthy growth market condition, a 5%–15% annualized premium (basis) is expected. # Squeeth Squeeth contracts, Keys advantages, Characteritics, Positions, Returns ### What is Squeeth ? Squeeth is a financial derivative for Ethereum, invented by the research team at Opyn. It is the first power perpetual ever and allows traders the exposure to ETH squared. It has a constant positive gamma, which means the payoff curve is always convexe. In terms of earning, when buying squeeth: 1. the more the price of ETH moves in your favor, the more money Squeeth will make you. 2. the more the price of ETH moves against you, the less money Squeeth will cost you. ### How to trade Squeeth: * To buy squeeth, a trader should first buy oSQTH. * To sell squeeth, a trader should deposit ETH as collateral for minting oSQTH. ### Key advantages compared to options : * No strikes, no expiration. * No liquidity fragmentation. * No need to roll position. * Constant gamma. ### Characteristics: It has a distinguishable set of characteristics, that are essential to assess to understand the mechanism and functionning of the contract. * Index price : The price of Ethereum squared. * Mark price : The current trading price of Squeeth. * Funding rate : A payment made by the long squeethers to short squeethers to keep being exposed to squeeth convexity. * In-kind funding : It is how payments are made. Long squeethers own an amount of tokens that we will call oSQTH. Short squeethers are in debt of the same token. Funding is not paid directly, but in a continuous way, meaning that at every second long squeethers lose some of the value of their owning in oSQTH and short squeethers debt decreases by the same amount. It is as if you are selling some of your position to pay funding. * oSQTH : It is the token you use to buy squeeth or mint it to sell it. * Normalization factor : A variable that adjusts the position for both short squeethers and long squeethers. ### Positions Traders can be either long squeeth or short squeeth . In this section we will explain both positions and the consequences of each one of them. #### Short squeeth : Shorting squeeth means selling squeeth. A trader buys oSQTH to mint squeeth, then sell it on a dedicated platform to a buyer. It is a collaterized position, since short squeethers buy oSQTH by putting ETH as a collateral. The ideal market conditions to be short squeeth is when ETH is trading sideways , meaning without high variations in volatility. #### Long squeeth : Longing Squeeth means buying squeeth. A trader buys oSQTH then use it to buy squeeth. It is not a collaterized position, hence can not be liquidated. The ideal market condition to be long squeeth is when the price jumps considerably. It is worth mentioning that holding a long position on squeeth for a long period of time is not efficient, since the funding costs will be too much. ### Returns #### Short squeeth return : * return from $$ETH^2$$ : a short squeether is selling squeeth, so he will endure a squared loss when eth prices increase. * return from daily funding : a short squeether earns a daily funding for taking the position. * return from ETH collateral : a short squeether needs to put ETH as a collateral to take a short position, so he earns a profit when ETH prices increase. The equation of short squeeth return is then : $$ return = -(change : in: eth: price)^2 + funding + collateral :return $$ #### Long squeeth return : * Return from $$ETH^2$$ : a long squeether earns a squared profit when eth prices increase. * Return from daily funding : as a premium for the convexity of longing squeeth, long squeethers will pay a funding to short squeethers. The equation of long squeeth return is then : $$ return = (change : in: eth: price)^2 - funding $$ #### References : For buying and selling squeeth : For more detailed articles about squeeth : * * * # Implied Volatility vs Realized Volatility {% hint style="info" %} **This metric shows the difference between Implied Volatility and Realized Volatility. Typically Realized Volatility lags behind Implied Volatility especially during rigorous market conditions.** {% endhint %} Volatility traders care not only about what is expected (Implied Volatility) but also what actually transpired (Realized Volatility). By knowing the difference between the two, a better view of the market (and option strategies) can be made. ![BTC Implied Volatility vs Realized Volatility](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FY8p12gf1E6WdSgzLWcJJ%2Fimage.png?alt=media\&token=6e5e9853-4fd6-4f9f-93ae-bfb0095c168a) ### Mean Reversion of Volatility From historical data, IV tends to overstate actual realized volatility(RV). The reason being that the fear of uncertainty is overblown, which leads to a positive outcome – option selling can be profitable for traders. ### Limitations We could look at the current implied volatility (IV) and compare it to realized volatility (RV). This however can be quite misleading, because RV is by definition a lagging indicator since it looks into the past. Past price action is not a predictor of future price action. # ATM IV Term Structure {% hint style="info" %} This metric shows the Implied Volatility of the at-the-money options for each expiration. {% endhint %} ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fd9qP6udElLdSgkKUrXEy%2Fimage.png?alt=media\&token=8d109879-01b0-48fa-84ef-ca44af82e456) # Time Lapse ATM IV Term Structure {% hint style="info" %} This metric shows the change in Implied Volatility of the at-the-money options for each expiration against a previous period. {% endhint %} ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FHwAF1LcLcGVERqMrY4K3%2Fimage.png?alt=media\&token=5b66168a-f7bc-457b-9fd2-fa3096482f32) # IV Term Structure by Strike {% hint style="info" %} This metric displays the Term Structure of volatility by strike price. {% endhint %} # IV Term Structure by Delta {% hint style="info" %} This metric displays the Term Structure of volatility by option delta. {% endhint %} # 10Δ 25Δ Skew/ Risk Reversal {% hint style="info" %} 10Δ 25Δ Skew: This metric measures the Skew values across different time periods by rolling maturity calculated by the following formula (source: Mixon):\ Skew (10-Delta 1M) = ((IV 10 Delta put 1M – IV 10 Delta call 1M)/ATM IV 1M)) \* 100\ \ 10Δ 25Δ Risk Reversal: This metric measures the difference between the Implied Volatility of puts and calls with similar delta (10-delta or 25-delta) in the same expiration using the following formula:\ RR (10-Delta 1M) = IV (10-Delta call 1M) – IV (10-Delta put 1M) {% endhint %} ### **10Δ (10-Delta) Skew** The 10 delta (10∆) skew measures the price of a call option with a delta of 0.10 and the price of a put option that has a delta of 0.10. If the skew increases then puts are becoming more expensive than calls; if the skew decreases, call premiums are going up against puts premiums. The 10-Delta Skew is a measure of volatility skew calculated by the following formula (source: Mixon): Skew (10-Delta 1M) = (IV 10 Delta put 1M – IV 10 Delta call 1M)/ATM IV 1M ### **25Δ (25-Delta) Skew** The 25 delta (25∆) skew measures the price of a call option with a delta of 0.25 and the price of a put option that has a delta of 0.25. If the skew increases then puts are becoming more expensive than calls; if the skew decreases, call premiums are going up against puts premiums. The 25-Delta Skew is a measure of volatility skew calculated by the following formula (source: Mixon):\ \ Skew (25-Delta 1M) = (IV 25 Delta put 1M – IV 25 Delta call 1M)/ATM IV 1M ## Risk Reversal Option Strategy A Risk Reversal is an option combo trade that consists of selling (that is, being short) an out-of-the-money Put and buying (i.e. being long) an out-of-the-money call, with both options expiring on the same expiration date. ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Ff4WyYafOppbFrZHuDLCx%2Fimage.png?alt=media\&token=5b797bb9-038d-49b1-9139-12077836d466) Often traders will look at the “25 risk reversal” which is the volatility of the 25 delta (out of the money) call less the volatility of the 25 delta (out of the money) put for a given maturity. A negative risk reversal means the volatility of puts is greater than the volatility of similar delta calls, **which implies more market participants are betting on a drop in the currency than on a rise, and vice versa if the risk reversal is positive.** ### **10Δ (10-Delta) Risk Reversal** Historical 10-delta Risk Reversal values across different time periods by rolling maturity. The risk reversal is another measure of volatility skew. I.E for 1 month it would be computed using this formula:\ \ RR (10-Delta 1M) = IV (10-Delta call 1M) – IV (10-Delta put 1M) ### **25Δ (25-Delta) Risk Reversal** Historical 25-delta Risk Reversal values across different time periods by rolling maturity. The risk reversal is another measure of volatility skew. I.E for 1 month it would be computed using this formula:\ \ RR (25-Delta 1M) = IV (25-Delta call 1M) – IV (25-Delta put 1M) # 10Δ 25Δ Butterfly {% hint style="info" %} This metric shows the historical 25-Delta Butterfly values across different time periods by rolling maturity. {% endhint %} Butterfly is the difference between the average volatility of the call price and put price with the same moneyness level (25-Delta) and the ATM volatility level. For instance a BF 25 could be expressed by the following formula:\ \ BF25 = (σ25C + σ25P) /2 – σATM\ \ Butterfly spreads measure the curvature (kurtosis). The higher the Butterfly spreads, the more ‘peaked’ is your implied volatility curve. # Probability Cone {% hint style="info" %} This metric uses statistical data to forecast future prices with specified probability. It plots a standard deviation bell curve designating ranges within which prices are expected to stay for each following expiration dates in the future.. {% endhint %} Probability Cone is useful to help identify where the asset price might go to before the expiration date, using standard deviation from option deltas. ![Probability Cone](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FgRxEXscLejlOHPPQpDCT%2Fimage.png?alt=media\&token=a8a39add-35cc-4467-aed2-70102b87cbf3) #### Here are some parameters you can change on the Probability Cone metric. **1. Volatility \[Vol]** - Change this setting to a preferred Implied Volatility level to project the probability of price expected in the future. Higher volatility will reflect a wider probability cone. Lower volatility will reflect a narrower probability cone. **2. Interval Confidence \[IC]** - Change this setting to simulate wider or narrower statistical price deviation. For example, if 68 is input for IC, the probability cone will show an area where the prices might stay in, with a 68% probability (1 S.D). If 95 is input for IC, the probability cone will show an area where the prices might stay in, with a 95% probability (2 S.D). Higher Interval Confidence will reflect a wider probability cone. Lower Interval Confidence will reflect a narrower probability cone. # Volatility Cone {% hint style="info" %} A technique for visualizing current option implied volatility relative to historic volatilities at different maturities. This technique, developed by Galen Burghardt, uses the range of historic volatilities for each option's maturity from, say, one month to two years or longer-depending upon the maturities of instruments available in the market. A historic volatility series is calculated for each period and 25% and 75% confidence intervals on either side of the mean historic volatility line are added. When the current implied volatility term structure is drawn on this diagram, the investor is able to determine how current option premiums compare to historic premium levels at various maturities. {% endhint %} The purpose of the volatility cone is to illustrate the ranges of volatility experience for different trading time periods. For instance, a one-year span can be split into 1-day, 1-week, 1-month or 3-months periods. Since crypto trades every day, this will give us \ If we look at the past 30-day period and capture the historical realized volatility, | Days To Expiry | Implied Volatility | 25th Percentile | 50th Percentile | 75th Percentile | Maximum | Minimum | Current | | -------------- | ------------------ | --------------- | --------------- | --------------- | ------- | ------- | ------- | | 7D | 77.3 | 61.5 | 82.5 | 103.5 | 142.4 | 32.7 | 50.7 | | 10D | 77.3 | 67.8 | 86.8 | 105.4 | 133.1 | 41.0 | 49.9 | | 20D | 73.8 | 79.6 | 90.7 | 101.7 | 108.5 | 58.0 | 78.9 | | 30D | 73.8 | 79.0 | 85.7 | 92.5 | 95.2 | 63.9 | 90.8 | | 60D | 72.7 | 73.3 | 78.0 | 82.6 | 84.3 | 64.6 | 81.9 | | 90D | 73.6 | 66.0 | 69.8 | 73.6 | 74.4 | 58.4 | 73.9 | | 180D | 75.6 | 68.3 | 70.1 | 71.9 | 72.5 | 64.9 | 71.8 | | 365D | 75.4 | 70.0 | 70.5 | 71.0 | 71.8 | 69.3 | 69.9 | The graphical representation of the table above would look like a cone as shown below, hence the name ‘Volatility Cone’. ![Volatility Cone of BTC](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FUJbnp7OktA588CXlzNUN%2Fimage.png?alt=media\&token=c0e5ce06-9db1-4546-b14d-4d0df1551d1e) The way to read the graph would be to first identify the 'Days to Expiry' and then look at all the data points that are plotted right above it. For example if the number of days to expiry is 30, then observe the data points (representing realized volatility) right above it to figure out the ‘Implied Volatility, Minimum, Maximum, 25/50/75 Percentile and Current'. ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FFNIMPIHOCqKE9Snq1TTb%2Fimage.png?alt=media\&token=f4411e01-8c09-4a90-9e9f-99d657231e64) # Call Option {% hint style="info" %} A Call option is a derivative contract that gives the buyer the right, but not the obligation, to purchase 1 unit of an underlying crypto at a certain price (called the  strike price) on or before the expiration date. If the underlying’s price goes up, the value of the Call option increases. Conversely, if it goes down, the value of the call option decreases. {% endhint %} ## Long Call **Payoff Diagrams:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FmJZV2z0FtW6ZlZK84qyt%2FLC.png?alt=media\&token=3930adbb-9ce3-41b6-b3d0-bcd976e08fa7) **Direction Assumption:** Bullish **Maximum Profit:** Unlimited **Maximum Loss:** Limited to Premium paid **Breakeven Price:** Strike Price + Premium paid **Theta:** Passage of Time -> Negative Effect\ The time value of the Long Call's premium, which the holder has "purchased" by paying for the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration. **Volatility:** \ If Volatility increases -> Positive Effect. \ If Volatility decreases -> Negative Effect. ## Short Call **Payoff Diagrams:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FG5gMjAd44jB8XZk51Zjc%2FSC.png?alt=media\&token=e0244e81-4e3b-496e-9f44-ffe9d366334c) **Direction Assumption:** Bearish **Maximum Profit:** Limited to Premium paid **Maximum Loss:** Unlimited **Breakeven Price:** Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The time value of the Short Call's premium, which the option seller has "collected" by selling the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration. **Volatility:** \ If Volatility increases -> Negative Effect. \ If Volatility decreases -> Positive Effect. # Put Option {% hint style="info" %} A Put option is a derivative contract that gives the buyer the right, but not the obligation, to sell 1 unit of an underlying crypto at a certain price (called the  strike price) on or before the expiration date. If the underlying’s price goes down, the value of the Put option increases. Conversely, if it goes up, the value of the Put option decreases. {% endhint %} ## Long Put **Payoff Diagrams:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FgzojuuDBl6XxYEeI4tmi%2FLP.png?alt=media\&token=7b4b6615-d8a7-46ea-894b-bce0086b2fea) **Direction Assumption:** Bearish **Maximum Profit:** Unlimited **Maximum Loss:** Limited to Premium paid **Breakeven Price:** Strike Price - Premium paid **Theta:** Passage of Time -> Negative Effect\ The time value of the Long Put's premium, which the holder has "purchased" by paying for the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration. **Volatility:** \ If Volatility increases -> Positive Effect. \ If Volatility decreases -> Negative Effect. ## Short Put **Payoff Diagrams:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fp4HiemNPmhgapZaqaqBw%2FSP.png?alt=media\&token=6e972140-b10d-4449-aeec-c4ee0fd6b5de) **Direction Assumption:** Bullish **Maximum Profit:** Limited to Premium paid **Maximum Loss:** Unlimited **Breakeven Price:** Strike Price - Premium paid **Theta:** Passage of Time -> Positive Effect\ The time value of the Short Put's premium, which the option seller has "collected" by selling the option, generally decreases or decays with the passage of time. Theta decrease accelerates as the option contract approaches expiration. **Volatility:** \ If Volatility increases -> Negative Effect. \ If Volatility decreases -> Positive Effect. # Bull Call Spread {% hint style="info" %} Also called Long Call Vertical, a Bull Call Spread is the simultaneous purchase of a lower strike price Call and sale of a higher strike price Call, with the same expiration. These are usually done with a debit. {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Bullish **Maximum Profit:** Limited to the difference between the two strike prices, minus the premium paid. Maximum profit is realized when the underlying moves to or above the Short Call strike price on expiration. **Maximum Loss:** Limited to premium paid. \ Maximum loss is realized if the spread expires worthless, when the underlying moves to or below the Long Call strike price on expiration. **Breakeven Price:** Equal to the Long Call Strike Price + Premium paid **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. It will erode the value of the Long Call in a bigger extent than the Short Call. **Volatility:** Negligible effect # Bear Call Spread {% hint style="info" %} Also called Short Call Vertical, a Bear Call Spread is the simultaneous sale of a lower strike price Call and purchase of a higher strike price Call, with the same expiration. These are usually done for a credit. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FNy1OJYQVpCaRtfJ054N0%2FOption%20Payoff%20Charts-BearC%20Spd.drawio.png?alt=media\&token=67136b9b-0be4-42d3-9430-631d67448906) **Direction Assumption:** Bearish **Maximum Profit:** Limited to premium received. \ Maximum profit is realized when the underlying moves to or below the Short Call strike price on expiration. **Maximum Loss:** Limited to the difference between the two strike prices, minus the premium received when selling the spread. Maximum loss realized when the underlying moves to or above the Long Call strike price on expiration. **Breakeven Price:** Equal to the Short Call Strike Price + Premium received **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the Short Call in a bigger extent than the Long Call. **Volatility:** Negligible effect # Bull Put Spread {% hint style="info" %} Also called Short Put Vertical, a Bull Put Spread is the simultaneous sale of a higher strike price Put and purchase of a lower strike price Put, with the same expiration. These are usually done for a credit. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FhEEcJrNTYGbDqxxGmcBl%2FOption%20Payoff%20Charts-BullP%20Spd.drawio.png?alt=media\&token=9b0891c5-2afb-48af-93b8-303bd28cdd2a) **Direction Assumption:** Bullish **Maximum Profit:** Limited to premium received. \ Maximum profit is realized when the underlying moves to or above the Short Put strike price on expiration. **Maximum Loss:** Limited to the difference between the two strike prices, minus the premium paid. Maximum profit is realized when the underlying moves to or above the Long Put strike price on expiration. **Breakeven Price:** Equal to the Long Call Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the Short Put in a bigger extent than the Long Put. **Volatility:** Negligible effect. # Bear Put Spread {% hint style="info" %} Also called Long Put Vertical, a Bear Put Spread is the simultaneous purchase of a higher strike price Put and sale of a lower strike price Put, with the same expiration. These are usually done with a debit. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F2bfbVKOollk3gNKBr35k%2FOption%20Payoff%20Charts-BearP%20Spd.drawio.png?alt=media\&token=cac4fb7d-1832-4ec7-8d76-e60dc8fd62c2) **Direction Assumption:** Bearish **Maximum Profit:** Limited to the difference between the two strike prices, minus the premium paid. Maximum profit is realized when the underlying moves to or below the Short Put strike price on expiration. **Maximum Loss:** Limited to premium paid. \ Maximum loss is realized if the spread expires worthless, when the underlying moves to or above the Long Put strike price on expiration. **Breakeven Price:** Equal to the Long Put Strike Price - Premium paid **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. It will erode the value of the Long Put in a bigger extent than the Short Put. **Volatility:** Negligible effect # Ratio Call Spread ## Long Ratio Call Spread {% hint style="info" %} A Long Ratio Call Spread is a combination of purchasing a lower strike Call and sale of two higher strike Calls, with the same expiration. This can be done with any ratio of long vs short Calls. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FJ2BogJdy1OE1sGtQbhzm%2FLong%20Call%20Ratio%20Spread%20v2.png?alt=media\&token=e7ac097a-06ed-4629-992c-96d368c3dd1e) **Direction Assumption:** Neutral-Bullish\ Ideally you want the underlying to rise all the way to the short strike price, but not go past the short strike. **Maximum Profit:** Limited to the net credit received. \ Maximum profit is realized when the underlying moves to Short Call strike price on expiration. **Maximum Loss:** Unlimited **Breakeven Price:** \ • If net credit received: Equal to the Short Call strike price + maximum profit potential.\ \ • If net debit paid: \ 1\) On the lower end, Equal to Long Call Strike Price + net debit paid.\ 2\) On the higher end, equal to the Short Call Strike Price + maximum profit potential. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the two Short Calls in a bigger extent than the Long Call. **Volatility:** \ If Volatility increases -> Negative Effect. \ If Volatility decreases -> Positive Effect. ## Short Ratio Call Spread # Ratio Put Spread ## Long Ratio Put Spread {% hint style="info" %} A Long Ratio Put Spread is a combination of purchasing a higher strike Put and sale of two lower strike Puts, with the same expiration. This can be done with any ratio of long vs short Puts. {% endhint %} ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FxYJhMyV2PYi6a7W552YD%2FLong%20Ratio%20Put%20Spread.png?alt=media\&token=ac34a3d0-cf39-4612-bf22-bc5f01162dbf) **Direction Assumption:** Neutral-Bearish\ Ideally you want the underlying to decline all the way to the short strike price, but not go past the short strike. **Maximum Profit:** Limited to the net credit received. \ Maximum profit is realized when the underlying moves to Short Put strike price on expiration. **Maximum Loss:** Unlimited **Breakeven Price:** \ • If net credit received: Equal to the Short Put strike price minus maximum profit potential.\ \ • If net debit paid: \ 1\) On the lower end, Equal to Long Put Strike Price minus net debit paid.\ 2\) On the higher end, equal to the Short Put Strike Price minus maximum profit potential. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the two Short Puts in a bigger extent than the Long Put. **Volatility:** \ If Volatility increases -> Negative Effect. \ If Volatility decreases -> Positive Effect. ## Short Ratio Put Spread # Bull Diagonal Spread A diagonal spread is constructed by purchasing a call/put far out in time, and selling a near term put/call on a further OTM strike to reduce cost basis. ## Bull Call Diagonal Spread {% hint style="info" %} A Bull Call Diagonal Spread is done with a purchase of a longer dated out-of-the-money Call option and sale of a shorter dated out-of-the-money Call option, both which have different strike prices. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fxp0Ejevmq57Bi0YZniqY%2FBull%20Call%20Diagonal%20$1$.png?alt=media\&token=7bfe2226-6134-4287-9d24-649206ccfa9f) **Direction Assumption:** Neutral-Bullish **Maximum Profit at Near-Dated Expiration:** Credit received from selling Call + Profit of Long Call\ Maximum profit at the near-dated expiration is realized when the underlying is at the Short Call strike price.\ \ **Maximum Profit at Far-Dated Expiration:** Unlimited
**Maximum Loss at Near-Dated Expiration::** Unlimited\ \ **Maximum Loss at Far-Dated Expiration:** Limited to the debit paid for the Long Call.\ Maximum loss at the far-dated expiration is realized if the underlying moves below the Long Call strike price. **Breakeven Price at Far-Dated Expiration:** Equal to the Long Call Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the Short Call in a bigger extent than the Long Call. **Volatility:** Positive Effect # Bear Diagonal Spread ## Bear Put Diagonal Spread {% hint style="info" %} A Bull Put Diagonal Spread is done with a purchase of a longer dated out-of-the-money Put option and sale of a shorter dated out-of-the-money Put option, both which have different strike prices. {% endhint %} ### **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fgi2MyFMNrkVtGLe2YDAH%2FBear%20Put%20Diagonal.png?alt=media\&token=2ef7a4ae-0c33-49b4-a5a0-8667b15fffdb) **Direction Assumption:** Neutral-Bearish **Maximum Profit at Near-Dated Expiration:** Credit received from selling Put + Profit of Long Put\ Maximum profit at the near-dated expiration is realized when the underlying is at the Short Put strike price.\ \ **Maximum Profit at Far-Dated Expiration:** Unlimited
**Maximum Loss at Near-Dated Expiration::** Unlimited\ \ **Maximum Loss at Far-Dated Expiration:** Limited to the debit paid for the Long Put.\ Maximum loss at the far-dated expiration is realized if the underlying moves below the Long Put strike price. **Breakeven Price at Far-Dated Expiration:** Equal to the Long Put Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the Short Put in a bigger extent than the Long Put. **Volatility:** Positive Effect # Iron Condor {% hint style="info" %} An Iron Condor is a market-neutral, defined-risk strategy that profits from positive time decay (theta). It is a combination of both a Bull Put Spread and a Bear Call Spread. {% endhint %} ## **Iron Condor** **Payoff Diagram:**

**Direction Assumption:** Bi-directional **Maximum Profit:** Equals to the dollar value(width) of the difference between the two strike prices of either the Bull Put Spread or Bear Call Spread (whichever is greater) minus the credit.\ Maximum loss occurs if the underlying is between the long put's and long call's strike price at expiration. **Maximum Loss:** Limited to net debit paid. **Breakeven Price:** \ • On the Put side, Short Put strike minus the net credit received.\ • On the Call side, Short Call strike plus the net credit received. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Iron Condors are Vega positive, meaning that if volatility increases, the position gains value. ## **Short Iron Condor** **Payoff Diagram:**

**Direction Assumption:** Neutral **Maximum Profit:** Limited to net credit received. **Maximum Loss:** Limited to the dollar value(width) of the difference between the two strike prices of either the Bull Put Spread or Bear Call Spread (whichever is greater) minus the credit.\ Maximum loss occurs if the underlying is below the long put's strike price or above the long call's strike price at expiration. **Breakeven Price:** \ • On the Put side, Short Put strike minus the net credit received.\ • On the Call side, Short Call strike plus the net credit received. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ Short Iron Condors are Vega negative, meaning that if volatility increases, the position loses value. # Iron Butterfly An Iron Butterfly is a combination of at-the-money Call and Put option, and also a out-of-the-money Call and Put option (at the wings). ## Short Iron Butterfly {% hint style="info" %} A Short Iron Butterfly is a combination of selling an at-the-money Call and Put option, and buying an out-of-the-money Call and Put option (at the wings). {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Neutral **Maximum Profit:** Limited to net credit received, which is calculated by credit received from selling the at-the-money Call and Put, minus the cost of buying the out-of-the-money Call and Put. **Maximum Loss:** Equals to the difference between the at-the-money and out-of-the-money strike, minus the net credit received.\ Maximum loss occurs if the underlying is below the out-of-the-money put's strike price or above the out-of-the-money call's strike price at expiration. **Breakeven Price:** \ • On the down side, out-of-the-money Put strike minus the net credit received.\ • On the up side, out-of-the-money Call strike plus the net credit received. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. **Volatility:** \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ Short Iron Butterflies are Vega negative, meaning that if volatility increases, the position loses value. ## Long Iron Butterfly {% hint style="info" %} A Long Iron Butterfly is a combination of buying an at-the-money Call and Put option, and selling an out-of-the-money Call and Put option (at the wings). {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Bi-directional **Maximum Profit:** Equals to the difference between the at-the-money and out-of-the-money strike, minus the net cost.\ Maximum profit occurs if the underlying is below the out-of-the-money put's strike price or above the out-of-the-money call's strike price at expiration. **Maximum Loss:** Limited to net cost, which is calculated by credit received from selling the out-of-the-money Call and Put, minus the cost of buying the at-of-the-money Call and Put. **Breakeven Price:** \ • On the down side, out-of-the-money Put strike plus the net cost paid.\ • On the up side, out-of-the-money Call strike minus the net cost paid. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Long Iron Butterflies are Vega positive, meaning that if volatility increases, the position gain value. # Long Call Butterfly {% hint style="info" %} A Long Call Butterfly is a combination of buying a Call, selling 2 higher strike price Calls, and buying an even higher strike price Call, with the same width across all strikes. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FISKh0R0TYs286qA9Shfj%2FOption%20Payoff%20Charts-LC%20Butterfly.drawio.png?alt=media\&token=1006f774-0363-4458-a479-55730772c6ad) **Direction Assumption:** Neutral if done with ATM short strikes, or Bullish if done with OTM short strikes. **Maximum Profit:** Limited to the difference between the Long Call strike and Short Call strike, minus debit paid. **Maximum Loss:** Limited to net debit paid. **Breakeven Price:** \ • On the lower end, lower Long Call strike plus the net debit paid.\ • On the higher end, higher Long Call strike minus the net debit paid. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ Long Call Butterflies are Vega negative, meaning that if volatility increases, the position loses value. # Short Call Butterfly {% hint style="info" %} A Short Call Butterfly is a combination of selling a Call, buying 2 higher strike price Calls, and selling an even higher strike price Call, with the same width across all strikes. {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Neutral if done with ATM long strikes, or Bullish if done with OTM long strikes. **Maximum Profit:** Limited to net premium collected. **Maximum Loss:** Limited to the higher Short Call strike minus Long Call strike minus net premium collected. **Breakeven Price:** \ • On the lower end, lower Short Call strike plus the net credit collected.\ • On the higher end, higher Short Call strike minus the net credit collected. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Short Call Butterflies are Vega positive, meaning that if volatility increases, the position gains value. # Long Put Butterfly {% hint style="info" %} A Long Put Butterfly is a combination of buying a Put, selling 2 lower strike price Puts, and buying an even lower strike price Put, with the same width across all strikes. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F8ENu9zAbpufZzc6rZGxO%2FOption%20Payoff%20Charts-LP%20Butterfly.drawio.png?alt=media\&token=447aaa57-22ec-447d-97b9-410f81424f9a) **Direction Assumption:** Neutral if done with ATM short strikes, or Bearish if done with OTM short strikes. **Maximum Profit:** Limited to lower Long Put strike minus Short Put strike, minus debit paid. **Maximum Loss:** Limited to net debit paid. **Breakeven Price:** \ • On the lower end, lowest Long Put strike plus the net debit paid.\ • On the higher end, highest Long Put strike minus the net debit paid. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ Long Put Butterflies are Vega negative, meaning that if volatility increases, the position loses value. # Short Put Butterfly {% hint style="info" %} A Short Put Butterfly is a combination of selling a Put, buying 2 lower strike price Puts, and selling an even lower strike price Put, with the same width across all strikes. {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Neutral if done with ATM long strikes, or Bearish if done with OTM long strikes. **Maximum Profit:** Limited to net premium collected. **Maximum Loss:** Limited to the higher Short Put strike minus Long Put strike minus net premium collected. **Breakeven Price:** \ • On the lower end, lower Short Put strike plus the net credit collected.\ • On the higher end, higher Short Put strike minus the net credit collected. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. Should the underlying stays between the short strikes at expiration, all legs will decay to zero and expire worthless. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Short Call Butterflies are Vega positive, meaning that if volatility increases, the position gains value. # Straddle ## Long Straddle {% hint style="info" %} A Long Straddle is the simultaneous purchase of an ATM Call and an ATM Put, with the same strike price and expiration. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FQEZVPJ8gRGDoYT7faj5l%2FLong%20Straddle.png?alt=media\&token=d097946f-1e60-491c-a11b-3af3f630f86d) **Direction Assumption:** Neutral **Maximum Profit:** Unlimited **Maximum Loss:** Limited to net debit paid.\ Maximum Loss occurs when the underlying is at the option strike at expiration, where both the Long Call and Long Put expires worthless. **Breakeven Price:** \ • On the lower end, option strike minus the net debit paid.\ • On the higher end, option strike plus the net debit paid. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Long Straddles are Vega positive, meaning that if volatility increases, the position gains value.\ Therefore, Long Straddles are best to be entered when volatility is relatively low. ## Short Straddle {% hint style="info" %} A Short Straddle is the simultaneous sale of an ATM Call and an ATM Put, with the same strike price and expiration. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FLZ1kdanebiFU7sadhM2Y%2FShort%20Straddle.png?alt=media\&token=d3baa261-b1f4-4beb-9e07-3a4986879e11) **Direction Assumption:** Neutral **Maximum Profit:** Limited to net credit received.\ Maximum Profit occurs when the underlying is at the option strike at expiration, where both the Short Call and Short Put expires worthless. **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, option strike minus the net credit received.\ • On the higher end, option strike plus the net credit received. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. **Volatility:** \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ Short Straddles are Vega negative, meaning that if volatility increases, the position loses value.\ Therefore, Short Straddles are best to be entered when volatility is relatively high. # Strangle ## Long Strangle {% hint style="info" %} A Long Strangle is the simultaneous purchase of an OTM Call and an OTM Put, with the same expiration. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FGXvB2HjPXRTKbKBh3kfr%2FLong%20Strangle.png?alt=media\&token=a89886b5-a8e7-4b84-8cb5-8a4ef53609d5) **Direction Assumption:** Neutral **Maximum Profit:** Unlimited **Maximum Loss:** Limited to net debit paid.\ Maximum Loss occurs when the underlying is between the two strike prices at expiration, where both the Long Call and Long Put expires worthless. **Breakeven Price:** \ • On the lower end, Long Put strike minus the net debit paid.\ • On the higher end, Long Call option strike plus the net debit paid. **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Long Strangles are Vega positive, meaning that if volatility increases, the position gains value.\ Therefore, Long Strangles are best to be entered when volatility is relatively low. ## Short Strangle {% hint style="info" %} A Short Strangle is the simultaneous sale of an OTM Call and an OTM Put, with the same expiration. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FGpp6qXxTJWrjufBOjZfB%2FShort%20Strangle.png?alt=media\&token=a22259a7-effe-4113-b7c3-b37ed8945687) **Direction Assumption:** Neutral **Maximum Profit:** Limited to the net credit received.\ Maximum Profit occurs when the underlying is between the two strike prices at expiration. **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, Short Put strike minus the net debit paid.\ • On the higher end, Short Call strike plus the net debit paid. **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. **Volatility:** \ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. \ \ Long Strangles are Vega positive, meaning that if volatility increases, the position gains value.\ Therefore, Long Strangles are best to be entered when volatility is relatively low. # Risk Reversal ## Long Risk Reversal {% hint style="info" %} A Long Risk Reversal is a bullish strategy which involves the simultaneous sale of an OTM Put and a purchase of an OTM Call of the same expiration. This can be done for either a net credit or debit, depending on the strikes chosen. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F0rJPruaV1nalQzDR5EXn%2FLong%20RR.png?alt=media\&token=2ba5312a-1f35-4dc7-b968-59b10abd1c2c) **Direction Assumption:** Bullish **Maximum Profit:** Unlimited **Maximum Loss:** Unlimited **Breakeven Price:** \ • If net credit received: Short Put strike minus credit received.\ • If net debit paid: Long Call strike plus debit paid. **Theta:** Negligible effect\ The net effect of time decay is negligible as it will erode the value of the Long Call in a similar extent as the Short Put. **Volatility:** \ **•** If net credit received: \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ **•** If net debit paid:\ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. ## Short Risk Reversal {% hint style="info" %} A Short Risk Reversal is a bearish strategy which involves the simultaneous sale of an OTM Call and a purchase of an OTM Put of the same expiration. This can be done for either a net credit or debit, depending on the strikes chosen. {% endhint %} **Payoff Diagram:** ![](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FNg6rQHW2aLRSMT03Ue1V%2FShort%20RR.png?alt=media\&token=74be07c6-8cf8-4466-ab25-c48d41836f89) **Direction Assumption:** Bearish **Maximum Profit:** Unlimited **Maximum Loss:** Unlimited **Breakeven Price:** \ • If net credit received: Short Call strike plus credit received.\ • If net debit paid: Short Put strike minus debit paid. **Theta:** Negligible effect\ The net effect of time decay is negligible as it will erode the value of the Long Put in a similar extent as the Short Call. **Volatility:** \ **•** If net credit received: \ If Volatility decreases -> Positive Effect.\ If Volatility increases -> Negative Effect. \ \ **•** If net debit paid:\ If Volatility decreases -> Negative Effect.\ If Volatility increases -> Positive Effect. # Calendar ## Long Call Calendar {% hint style="info" %} A Long Call Calendar is done with the purchase of a further dated Call option and sale of a nearer dated Call option, both which have the same strike price. {% endhint %} **Payoff Diagram:** ![Long Call Calendar Spread with OTM Calls](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2F3T8ZnQ6qXnCZzcbvB0vM%2FLC%20Calendar.png?alt=media\&token=f673416f-ed42-4059-bbcb-c5c6e725fb03) **Direction Assumption:** Neutral-Bullish **At Near-Dated Expiration,** **Maximum Profit:** Credit received from selling Call + Profit of Long Call\ Maximum profit at the near-dated expiration is realized when the underlying is at the near dated Short Call strike price.\ \ **Maximum Loss:** Unlimited **At Far-Dated Expiration,** **Maximum Profit:** Unlimited\ \ **Maximum Loss:** Limited to the debit paid for the Long Call.\ Maximum loss at the far-dated expiration is realized if the underlying moves below the Long Call strike price. **Breakeven Price at Far-Dated Expiration:** Equal to the Long Call Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the near dated Short Call faster than the far dated Long Call. **Volatility:** Neutral ## Reverse**/ Short** Call Calendar {% hint style="info" %} A Short Call Calendar is done with the sale of a further dated Call option and purchase of a nearer dated Call option, both which have the same strike price. {% endhint %} **Payoff Diagram:** ![Short Call Calendar Spread with OTM Calls](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FGp7ecXBYU7RYNuBDE9Wi%2FSC%20Calendar.png?alt=media\&token=dbc70733-bd11-4960-9be0-883a9704469c) **Direction Assumption:** Neutral-Bearish **At Near-Dated Expiration,** **Maximum Profit:** Limited to debit paid\ \ **Maximum Loss:** Limited to the debit paid for the near dated Long Call + Time decay of far-dated Short Call\ Maximum loss at the near-dated expiration is realized when the underlying is at the near dated Long Call strike price.\ \ **At Far-Dated Expiration,** **Maximum Profit:** Limited to credit received from the further dated Short Call\ \ **Maximum Loss:** Unlimited
**Breakeven Price at Far-Dated Expiration:** Equal to the Short Call Strike Price + Short Call credit received **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. It will erode the value of the near dated Long Call faster than the far dated Short Call. **Volatility:** Neutral ## Long Put Calendar {% hint style="info" %} A Long Put Calendar is done with the purchase of a further dated Put option and sale of a nearer dated Put option, both which have the same strike price. {% endhint %} **Payoff Diagram:** ![Long Put Calendar Spread with OTM Puts](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2Fizh97N1OgAGGLRaoVmvb%2FLP%20Calendar.png?alt=media\&token=81e85b8f-34b7-404d-afca-cb60fe6bfa44) **Direction Assumption:** Neutral-Bearish **At Near-Dated Expiration,** **Maximum Profit:** Credit received from selling Put + Profit of Long Put\ Maximum profit at the near-dated expiration is realized when the underlying is at the Short Put strike price.\ \ **Maximum Loss at Near-Dated Expiration::** Unlimited **At Far-Dated Expiration,** **Maximum Profit:** Unlimited\ \ **Maximum Loss:** Limited to the debit paid for the Long Put.\ Maximum loss at the far-dated expiration is realized if the underlying moves below the Long Put strike price. **Breakeven Price at Far-Dated Expiration:** Equal to the Long Put Strike Price + Premium paid **Theta:** Passage of Time -> Positive Effect\ The net effect of time decay is positive. It will erode the value of the near dated Short Put in a bigger extent than the far dated Long Put. **Volatility:** Positive Effect ## Reverse**/ Short** Put Calendar {% hint style="info" %} A Short Put Calendar is done with the sale of a further dated Put option and purchase of a nearer dated Put option, both which have the same strike price. {% endhint %} **Payoff Diagram:** ![Short Put Calendar Spread with OTM Puts](https://1780133611-files.gitbook.io/~/files/v0/b/gitbook-x-prod.appspot.com/o/spaces%2F5XlTHrw6jWA1Duk8yCcW%2Fuploads%2FBAlsS1r7R1z7TbAkEIqh%2FSP%20Calendar.png?alt=media\&token=5a6375fa-b688-4490-80f3-7bc0d148a890) **Direction Assumption:** Neutral-Bullish **At Near-Dated Expiration,** **Maximum Profit:** Limited to debit paid\ \ **Maximum Loss:** Limited to the debit paid for the near dated Long Put + Time decay of far-dated Short Put\ Maximum loss at the near-dated expiration is realized when the underlying is at the near dated Long Put strike price.\ \ **At Far-Dated Expiration,** **Maximum Profit:** Limited to credit received from the further dated Short Put\ \ **Maximum Loss:** Unlimited
**Breakeven Price at Far-Dated Expiration:** Equal to the Short Put Strike Price - Short Put credit received **Theta:** Passage of Time -> Negative Effect\ The net effect of time decay is negative. It will erode the value of the near dated Long Put faster than the far dated Short Put. **Volatility:** Neutral # Synthetic ## Long Synthetic {% hint style="info" %} A Long Synthetic is a bullish directional strategy which is a combination of a Long Call and a Short Put with the same strike price and expiration. {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Bullish **Maximum Profit:** Unlimited **Maximum Loss:** Unlimited **Breakeven Price:** Price of Underlying during entry. **Theta:** Passage of Time -> Neutral **Volatility:** Neutral ## Short Synthetic {% hint style="info" %} A Short Synthetic is a bearish directional strategy which is a combination of a Long Put and a Short Call with the same strike price and expiration. {% endhint %} **Payoff Diagram:**

**Direction Assumption:** Bearish **Maximum Profit:** Unlimited **Maximum Loss:** Unlimited **Breakeven Price:** Price of underlying during entry. **Theta:** Passage of Time -> Neutral **Volatility:** Neutral # Call Ladder A Call Ladder is a combination of an in-the-money call, an at-the-money call and another call strike further out-of-the-money of the same expiration date. ## Long Call Ladder **Payoff Diagram:**

**Direction Assumption:** Moderately Bullish **Maximum Profit:** Limited **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, Long Call strike plus the net debit paid.\ • On the higher end, 2 Short Call strikes minus Long Call strike minus the net debit paid. **Theta:** \ • If underlying price is trading either below the lower breakeven or above the higher breakeven price -> Negative\ • If underlying price is trading between the two breakeven prices -> Positive **Volatility:** Negative ## Short Call Ladder **Payoff Diagram:**

**Direction Assumption:** Moderately Bearish **Maximum Profit:** Limited **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, Short Call strike plus the net credit received.\ • On the higher end, 2 Long Call strikes minus Short Call strike minus the net credit received. **Theta:** \ • If underlying price is trading either below the lower breakeven or above the higher breakeven price -> Positive\ • If underlying price is trading between the two breakeven prices -> Negative **Volatility:** Positive # Put Ladder A Put Ladder is a combination of an in-the-money put, an at-the-money put and another put strike further out-of-the-money of the same expiration date. ## Long Put Ladder **Payoff Diagram:**

**Direction Assumption:** Moderately Bearish **Maximum Profit:** Limited **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, Long Put strike plus the net debit paid.\ • On the higher end, 2 Short Put strikes minus Long Put strike minus the net debit paid. **Theta:** \ • If underlying price is trading either below the lower breakeven or above the higher breakeven price -> Negative\ • If underlying price is trading between the two breakeven prices -> Positive **Volatility:** Negative ## Short Put Ladder **Payoff Diagram:**

**Direction Assumption:** Moderately Bullish **Maximum Profit:** Limited **Maximum Loss:** Unlimited **Breakeven Price:** \ • On the lower end, Short Put strike plus the net credit received.\ • On the higher end, 2 Long Put strikes minus Short Put strike minus the net credit received. **Theta:** \ • If underlying price is trading either below the lower breakeven or above the higher breakeven price -> Positive\ • If underlying price is trading between the two breakeven prices -> Negative **Volatility:** Positive