Like it or not, for crypto investors, the policy of the US Federal Reserve regarding interest rate hikes and high inflation is the most relevant measure to gauge the demand for risky assets. By increasing the cost of capital, the Fed boosts the return of fixed income instruments, but this hurts the stock market, real estate, commodities and cryptocurrencies.
One positive aspect of the Fed meetings is that they are scheduled well in advance, so Bitcoin (BTC) traders can prepare for them. Historically, Federal Reserve policy decisions cause extreme intraday volatility in risk assetsbut traders can use derivative instruments to get optimal results as the Fed adjusts interest rates.
Another challenge for traders is that they are facing pressure that Bitcoin is highly correlated with equities. For example, the 50-day correlation coefficient against S&P 500 futures has exceeded 70% since February 7. Although it does not establish cause and consequence, it is clear that cryptocurrency investors are waiting for the direction of traditional markets.
It is also possible that low Bitcoin issuances could turn out to be a benefit as investors realize that the Fed is running out of options to curb inflation. By raising interest rates even higher, it could cause US government debt payments to spiral out of control and eventually top $1 trillion a year.. This creates a huge incentive for Bitcoin bulls, but those willing to place trades based on rising interest rates should exercise caution.
Risk-seekers could benefit from buying Bitcoin futures contracts to leverage their positions, but could also liquidate if there is a sudden negative price move before the March 22 Fed decision. For this reason, professional traders are more likely to opt for option trading strategies like the skewed iron condor.
A balanced risk approach to using call options
By trading multiple call options for the same expiration date, traders can make profits 3 times the potential losses. This options strategy allows the investor to profit from gains while limiting losses.
It is important to remember that all options have a set expiration date, so the Bitcoin price increase must occur during the set period.
Below are the expected profits using Bitcoin options for the March 31 expiration, but this methodology can also be applied to different time frames. Although costs will vary, overall effectiveness will not be affected.
The call option gives the buyer the right to purchase an asset, but the seller of the contract receives negative (potential) exposure. The iron condor consists of selling call and put options at the same price and expiration date.
As shown above, the target profit zone is above $23,800, and the worst case scenario is 0.217 BTC (or $5,156 at current prices) if the expiration price on March 31 falls below $23,000. .
To start the operation, The investor must buy 6.2 contracts of the USD 23,000 put option. Next, the buyer must sell 2.1 $25,000 call option contracts and another 2.2 $27,000 call option contracts. Next, the investor must sell 3.5 $25,000 put option contracts combined with 2 $27,000 put option contracts.
As the last step, the investor must buy 3.9 contracts of the $29,000 call option to limit losses above the level.
This strategy yields a profit if Bitcoin trades between $23,800 and $29,000 on March 31. Net profits peak at 0.276 BTC ($6,558 at current prices) between $25,000 and $27,000, but stay above 0.135 BTC ($3,297 at current prices) if Bitcoin trades between $24,400 and $27,950.
The investment required to open this skewed iron condor strategy is the maximum loss, therefore 0.217 BTC or $5,156, which will occur if Bitcoin trades below $23,000 on March 31. The advantage of this strategy is the wide target profit zone, which offers a better risk-reward ratio than leveraged futures trading, especially given the limited downside risk.
The views, thoughts and opinions expressed herein are those of the authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.
This article does not contain investment advice or recommendations. All investments and trades involve risk, and readers should do their own research when making a decision.
The call option gives the buyer the right to acquire an asset, but the contract seller receives (potential) negative exposure. The iron condor consists of selling the call and put options at the same expiry price and date.
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