Bitcoin Options: Strategies for Navigating 10% Fluctuations in BTC Price

Here’s how Bitcoin (BTC) traders can capitalize on price movements, whether it rises or falls by 10% within 55 days.

Bitcoin options: Preparing for volatility

Market analysts have begun to predict an increase in volatility due to discussions surrounding U.S. government debt.

Additionally, unexpected signs of strain from the banking sector have caught investors off guard after the U.S. Dollar Index (DXY), which gauges the U.S. dollar against a selection of foreign currencies, hit its lowest point in a year at 101 on May 4.

Stock market and macro analyst Markets & Mayhem shared a chart from Deutsche Bank that links historical government expenditure and debt worries with surges in stock market volatility.

Volatility could escalate amid a government debt crisis as the kabuki theater continues
Source: Deutsche pic.twitter.com/fmJVKvUZvc

— Markets & Mayhem (@Mayhem4Markets) May 1, 2023

U.S. Treasury Secretary Janet Yellen has cautioned that the government may exhaust its cash reserves by June if Congress does not raise the debt ceiling. As reported by the BBC, President Joe Biden has convened a meeting of congressional leaders on this matter for May 9.

Officials have indicated that overspending is partly due to lower-than-anticipated income tax revenues, which are common during recessionary periods.

Volatility may influence Bitcoin price, but direction is uncertain

It is important to understand that the volatility indicator does not determine whether the market is gaining strength or predict potential crashes.

The index’s calculation does not factor in price increases or decreases, only directional shifts. Therefore, if volatility reaches historically low levels, it simply indicates that the asset has shown minimal daily price fluctuations.

Bitcoin 40-day realized volatility. Source: TradingView

Observe that Bitcoin’s 40-day historical volatility typically does not stay below 40% for extended periods. This information, combined with the stress in traditional markets stemming from the regional banking crisis and the debt ceiling discussions, may be setting the stage for a significant volatility increase.

While one can take advantage of the anticipated higher volatility in the coming weeks, many investors are hesitant to make directional bets, indicating a lack of confidence in whether the market will rise or fall.

Nonetheless, there exists an options strategy that accommodates this situation and enables investors to benefit from a substantial move in either direction.

The reverse (short) iron butterfly is a limited-risk, limited-reward options trading strategy. It is crucial to remember that options have a specific expiration date, meaning the price movement must occur within the defined timeframe.

Profit/Loss estimate. Source: Deribit Position Builder

The option prices mentioned were recorded on May 5, with Bitcoin trading at $29,172. All options listed are set for a June 30 expiration, although this strategy can also be applied using a different timeframe.

The proposed non-directional strategy involves selling 9.2 BTC contracts of the $26,000 put options while concurrently selling 12.2 call options with a $33,000 strike price. To complete the trade, one should purchase 13.5 contracts of $30,000 call options and an additional 8 contracts of $30,000 put options.

While this call option grants the buyer the right to acquire an asset, the seller of the contract faces potential negative exposure. To fully hedge against market fluctuations, one must deposit 0.90 BTC (approximately $26,250), which represents the maximum loss for investors.

Conviction is crucial, as the risk-reward ratio is inverted

For this investor to achieve a profit, Bitcoin’s price must be below $27,000 on June 30 (a decrease of 7.5%) or above $32,150 (an increase of 10.2%). Essentially, the trade offers a highly profitable range, but incurs losses exceeding twice the potential gain if Bitcoin does not experience significant movement in either direction.

The maximum payout is 0.337 BTC (approximately $9,830), but if a trader is confident that volatility is imminent, a 10% price change within 55 days appears quite achievable.

It is important to note that the investor can reverse the operation before the options expiration, ideally right after a substantial price movement in Bitcoin. All that is required is to buy back the two options that were sold and sell the other two that were previously purchased.

This article does not provide investment advice or recommendations. Every investment and trading decision carries risk, and readers should perform their own research before making any choices.