Volatility short squeeze

Understanding 'Volatility Short Squeeze'

The term 'Volatility Short Squeeze' might sound a bit intimidating, especially for beginners in the domain of option trading with cryptocurrencies. However, once broken down, it's fairly simple to understand. Let's unpack this term and delve into what it means in the world of crypto option trading.

What is Volatility?

Volatility refers to the degree of variation in the price of a financial instrument over a certain time period. In the context of cryptocurrencies, volatility refers to the rate at which the price of a cryptocurrency increases or decreases for a set of returns. Cryptocurrencies are notoriously known for their high volatilities.

The 'Short' in Volatility Short Squeeze

A 'Short' is a trading strategy where a trader borrows a commodity, such as a stock or in this case, a cryptocurrency, and sells it with the hope that the price will decrease in the future and he can buy it back at a lower price.

What is a 'Short Squeeze'?

A 'Short Squeeze' ensues when a traded commodity's price increases rather than decreasing as the short sellers expected. This leads to short sellers rush to buy it back to avoid further losses, causing the price to inflate even more.

So, What's a 'Volatility Short Squeeze'?

In the context of cryptocurrency options trading, a 'Volatility Short Squeeze' typically happens during highly volatile periods. When the price of the cryptocurrency increases abruptly, it triggers a short squeeze as traders who had bet on the price going down are forced to buy back into the market to avoid massive losses. This unexpected influx of buying accentuates the price increase, causing more short sellers to cover their positions. Therefore, the volatility of the cryptocurrency is squeezed upwards.

Importance of Understanding 'Volatility Short Squeeze'

Mastering the dynamics of a 'Volatility Short Squeeze' can help traders make more informed and strategic betting decisions. While this scenario is often associated with heightened risk levels due to increased price volatility, it also presents potential lucrative opportunities for profit-making.