Smart options trading strategy for prudent traders

Bitcoin entered an upward channel in early January, and despite trading sideways near $40,000, order book analysts cited significant buying pressure to note that overall negative sentiment is slowly drying up.

Bitcoin 1 Day Price Chart | Source: TradingView

Independent analyst Johal Miles noted that BTC formed a bullish hammer candle on the daily chart on January 24 and February 24, indicating that the long-term downtrend is coming to an end.

However, the rally above $41,000 on Feb. 28 failed to generate strong demand from traders in Asia, as demonstrated by peer-to-peer USDT trading in China not much deviating from the dollar. America.

Currently, the community is receiving positive news that the global e-commerce market eBay has the potential to accept digital currency. 27, CEO Jamie Iannone revealed the tech giant is looking to transition to new payment methods for a fraction of the $85 billion annual live volume traded on the platform. this.

Bitcoin bulls also have a strong bullish case if the European Commission plans to isolate Russia from the international SWIFT cross-border payments network.

In addition to removing Russia from SWIFT, the European Commission will cripple the assets of Russia’s central bank. Whether intended or not, this demonstrates Bitcoin’s decentralization benefits as a censorship-resistant medium of exchange and store of value.

Risk reversal strategy suitable for current scenario

Although many people believe that futures and options are widely used for gambling and excessive leverage, these instruments are actually designed for hedging (protection).

Options trading offers an opportunity for investors to profit from increased volatility or gain protection from a sharp drop in prices. These complex investment strategies involve more than just structured options.

Traders can use the risk reversal strategy to hedge against losses due to unexpected price movements. Investors benefit from long calls, but pay out put put sellers. This setup essentially eliminates the risk of sideways trading but comes with significant risk if the trading asset falls.

Estimated profit and loss | Source: Deribit Position Builder

The above trade focuses only on March 31 options, but investors will find many similar patterns using different maturities. Bitcoin is trading at $41,767 at valuation.

First, the trader needs to protect from the downside by buying 2 puts of $34,000. The trader would then sell 1.8 BTC put at $38,000 for a net profit above this level. Finally, buy 3 calls at $52,000 for a positive price.

Investors are protected against a scenario of a drop to $38,000

That option structure resulted in no profit or loss in the range of $38,000 (9% decrease) to $52,000 (up 24.5%). As a result, investors are betting the Bitcoin price at 3:15 p.m. KST on March 31 will be above that range while achieving unlimited profit and maximum loss of 0.214 BTC.

If Bitcoin price rises to $56,000 (+34%), this investment will result in a gain of 0.214 BTC. While there are no costs associated with this option structure, the exchange will require a margin to cover possible losses.

Leave a Reply

Your email address will not be published. Required fields are marked *