Faced liquidation with Bitcoin futures? Utilize this options strategy for 3.5x leverage.

Bitcoin (BTC) enthusiasts may feel let down as the $31,000 resistance level proved to be more formidable than anticipated on April 14. Nevertheless, when considering a longer time frame, Bitcoin has emerged as the top-performing asset in 2023, with a year-to-date increase of over 74%, currently priced at $29,000.

Positioning for a weaker dollar and debt ceiling

It is important to highlight that gold is only 4% shy of its all-time high, which likely suggests a weakening U.S. dollar as investors raise concerns about a recession and potential fiscal instability for the largest economy in the world.

Driving the bullish price trend for Bitcoin are the vulnerabilities in the U.S. financial system, particularly the $100 billion in quarterly net withdrawals at First Republic Bank and the legislative push to approve an increase to the pressing $31.6 billion national debt ceiling.

For Bitcoin investors, a financial crisis can be advantageous as it compels the U.S. Federal Reserve to broaden its emergency funding initiatives and eliminate additional unprofitable long-term debt from the economy.

Cryptocurrency traders are uneasy about the regulatory landscape, and the statement from the New York Federal Reserve on April 25 has further contributed to the uncertainty. The guidelines revealed could potentially restrict the USD Coin (USDC) stablecoin issuer Circle’s access to the Fed’s securities reverse-repurchase program, which is the safest method to earn yield on deposits.

Unfortunately, there is no method to foresee how the banking crisis will progress or the timeline for regulatory actions against exchanges and stablecoin issuers. Conversely, “easy money” policies are widely recognized by investors as highly beneficial for scarce assets.

This situation clarifies why professional traders have been employing the bullish Iron Condor strategy to optimize gains if Bitcoin surpasses $32,000 in May while maintaining limited risk.

Call and put Bitcoin options to hedge the bet

Acquiring Bitcoin futures is profitable during bullish markets, but the challenge arises when managing liquidations if the BTC price declines. This is why professional traders implement options strategies to enhance their profits and minimize their losses.

The skewed Iron Condor strategy can generate profits above $31,400 by the end of May while capping losses if the expiry price falls below $31,000. It is noteworthy that Bitcoin was trading at $29,730 when this pricing model was established.

Bitcoin options Iron Condor strategy returns. Source: Deribit Position Builder

The call option grants its holder the right to purchase an asset at a predetermined price in the future. For this right, the buyer pays an upfront fee known as a premium.

In contrast, the put option enables its holder to sell an asset at a fixed price in the future, serving as a downside protection strategy. Conversely, selling this instrument (put) provides exposure to potential price increases.

The Iron Condor involves selling both call and put options at the same expiry price and date. The example above utilizes the May 26 contracts, but it can be modified for different timeframes.

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Modest 6% Bitcoin price gain needed for profits

As illustrated above, the target profit range is $31,420 (6% above the current $29,730 price) to $36,000 (21.2% above the current price). To initiate the trade, the investor must short (sell) 1.5 contracts of the $33,000 call option and 3 contracts of the $33,000 put option. Subsequently, the buyer must repeat this process for the $35,000 options, maintaining the same expiry month.

Additionally, purchasing 4.8 contracts of the $31,000 put option is necessary to guard against potential downside risks. Finally, one must acquire 7.8 contracts of the $36,000 call option to limit losses above that level.

This strategy’s maximum profits reach 0.225 BTC ($6,685 at current prices) between $33,000 and $36,000, but they remain above 0.063 BTC ($1,750 at current prices) if Bitcoin trades within the $31,850 and $35,700 range.

The capital required to implement this skewed Iron Condor strategy is the maximum loss — 0.063 BTC or $1,750 — which will occur if Bitcoin trades below $31,000 on May 26.

The advantage of this trade is that it encompasses a broad target area while offering a 357% return relative to the potential loss. Essentially, it presents a leverage opportunity without the liquidation risks commonly associated with futures contracts.

This article does not provide investment advice or recommendations. Every investment and trading action carries risk, and readers should perform their own research when making decisions.