Some of the world’s biggest companies are expected to report their second-quarter results in October, including electric carmaker Tesla on October 18, tech giants Meta and Microsoft on October 24, Apple and Amazon on October 26 and Google on October 30. Currently, the possibility of an even more severe global economic slowdown hangs in the air, and lackluster earnings could add to the uncertainty.
Given the unprecedented nature of the US Federal Reserve tightening and growing macroeconomic uncertainty, investors fear that corporate profitability is starting to deteriorate. Furthermore, persistent inflation continues to force companies to cut back on hiring and adopt cost-cutting measures.
The strengthening of the dollar hits US-listed companies especially hard because their products become more expensive in other countries and the reduction in revenue from abroad negatively affects results. Google, for example, is expected to grow revenue by less than 10%, up from 40% growth in 2021.
The companies that make up the S&P 500 represent an aggregate value of $32.9 trillion and crypto investors expect some of those bets to go into Bitcoin (BTC) if earnings season fails to sustain modest growth, signaling that the market stocks should continue to underperform well.
On the one hand, traders face pressure from Bitcoin’s correlation with the stock market, but on the other hand, the scarcity of BTC could shine as concerns about inflation surface. This possibly creates a huge opportunity for those betting on a rise in BTC price, but extreme caution would also be needed for those opening positions.
Risk-averse traders could use futures contracts to leverage their long positions, but they also risk being liquidated if there is a sudden negative price move before the corporate earnings report date. Consequently, professional traders are more likely to opt for options trading strategies such as “long butterfly”.
By holding multiple call options for the same expiration date, traders can make profits three times higher than potential losses. This options strategy allows the trader to benefit from the rallies and limit losses.
It is important to remember that all options have a specific expiration date, so the revaluation of the asset price must occur during the defined period.
A precautionary approach in the use of call options
Below are the expected returns using Bitcoin options for the October 28 expiration, but this methodology can also be applied using different time frames. Although costs will vary, overall effectiveness will not be affected.
This call option gives the buyer the right to purchase an asset, but the seller of the contract receives negative (potential) exposure. The “long butterfly” strategy requires a short position via a call option, but the trade is hedged on both sides, limiting exposure.
To initiate execution, the investor buys 13 Bitcoin call options with a strike price of $20,000 and sells 24 contracts of the $23,000 call option. To end the trade, 10.5 BTC contracts of the $26,000 call options would be purchased to avoid losses above that level.
Derivatives exchanges price contracts in BTC terms, and $19,222 was the price when this strategy was put together.
Using this strategy, anything between $20,690 (up 7.6%) and $26,000 (up 35.3%) produces a net profit – for example, the optimal 20% price increase to $23,000 results in a net profit of 1.36 BTC, or $24,782 at current levels. Meanwhile, the maximum loss is 0.46 BTC or $8,382 if the price at expiration on October 28 is below $20,000.
The “long butterfly” strategy provides a potential profit that is three times greater than the maximum loss.
Overall, the strategy offers a better risk-reward ratio than speculating on leveraged futures, especially considering the low downside risk. It certainly looks attractive to those who expect a deterioration in the commercial conditions of public companies.
It should be noted that the only initial commission required is 0.46 BTC, which is enough to cover the maximum loss.
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