This is how Bitcoin (BTC) traders can profit if its price goes up or down 10% in 55 days.
Bitcoin Options: Prepare for Volatility
Traditional market analysts have started forecasting a spike in volatility due to the US government debt debate.
In addition, signs of stress coming from the banking sector surprised investors after the US dollar index (DXY), which measures the dollar’s value against a basket of currencies, hit its lowest level in 12 months at 101 on May 4.
Stock and macro analyst Markets & Mayhem has published a chart from Deutsche Bank that correlates historical concerns about government spending and debt with spikes in stock market volatility.
Volatility could rise into a government debt debacle as the kabuki theater carries on
Source: Deutsche pic.twitter.com/fmJVKvUZvc
—Markets & Mayhem (@Mayhem4Markets) May 1, 2023
US Treasury Secretary Janet Yellen has warned that the government could run out of liquidity in June if Congress fails to raise the debt ceiling. According to the BBC, the President, Joe Biden, has called a meeting of the leaders of Congress on this issue for May 9.
Government officials said the excess spending is partly due to lower-than-expected income tax collection, typical of recessionary periods.
Volatility could affect the price of Bitcoin, but the direction is unknown
It should be noted that the volatility indicator neither dictates whether the market has been gaining strength nor anticipates eventual collapses.
The index calculation does not take into account price gains or losses, but only changes in direction. Thus, if volatility reaches historically low levels, it simply reflects that the asset has shown a low amplitude of daily price fluctuations.
Bitcoin’s historical 40-day volatility doesn’t usually stay below 40% for long. That information, coupled with traditional market stress caused by the regional banking crisis and the debt ceiling debate, could be brewing the perfect storm for a sharp rebound in volatility.
While one can benefit from the expectation of increased volatility over the next two weeks, most investors are unwilling to take directional bets, which means they are not confident whether the market will move higher or lower.
However, there is an options strategy that fits this scenario and allows investors to benefit from a strong move on either side.
The Reverse Iron Butterfly (Short) is an option trading strategy with limited risk and limited reward. It is important to remember that options have a set expiration date, which means that the price change must occur during the defined period.
The above option prices were taken on May 5, with Bitcoin trading at $29,172. All options listed are for the June 30 expiration, but this strategy can also be used using a different time frame.
The suggested non-directional strategy is to sell 9.2 BTC in $26,000 put option contracts and 12.2 BTC in call option contracts with a strike price of $33,000. To complete the operation, you would have to buy 13.5 BTC in USD 30,000 call option contracts and another 8 BTC in USD 30,000 put options.
While this call option gives the buyer the right to purchase an asset, the seller of the contract gains (potential) negative exposure. To fully protect yourself from market swings, you have to deposit 0.90 BTC (about $26,250), which represents the investor’s maximum loss.
Conviction is essential, as the risk-reward relationship is reversed
For this investor to make a profit, he needs the price of Bitcoin to be below $27,000 on June 30 (down 7.5%) or above $32,150 (up 10.2%). The trade has a hugely profitable zone, but loses more than double the potential profit if Bitcoin doesn’t move significantly in either direction.
The maximum payout is 0.337 BTC (about $9,830), but if a trader is confident that volatility is just around the corner, a 10% move in 55 days seems quite feasible.
The investor can reverse the trade prior to the expiration of the options, preferably after a strong Bitcoin price movement. All you have to do is buy back the two options that have been sold and sell the other two that were previously bought.
This article does not contain investment advice or recommendations. All investing and trading involves risk, so readers should do their own research before making a decision.
Investments in crypto assets are not regulated. They may not be suitable for retail investors and the entire amount invested may be lost. The services or products offered are not directed or accessible to investors in Spain.