This Bitcoin options approach enables proactive traders to get ready for BTC’s upcoming surge.

On May 12, Bitcoin’s price (BTC) fell below its 55-day resistance level of $27,000, marking a 12.3% decline over the past month. More significantly, it diverged from the S&P 500 index, which has remained relatively unchanged over the same period and is currently 15% below its peak.

Bitcoin price in USD (right) vs. S&P 500 futures (left), 12-hour. Source: TradingView

The chart suggests that Bitcoin investors perceive that the positive macroeconomic conditions for risk assets have been overshadowed by a heightened risk perception within the cryptocurrency sector.

Financial crisis could drive Bitcoin’s price up

To begin with, there is the looming U.S. government debt ceiling crisis, which U.S. Treasury Secretary Janet Yellen has warned could lead to an “economic and financial disaster.” The heightened risk of default should theoretically favor scarce assets as investors look for refuge from a weakening U.S. dollar.

The $5.6 trillion commercial real estate sector in the United States faces additional challenges due to elevated interest rates and struggling regional banks. Guggenheim Partners’ chief investment officer Anne Walsh remarked, “We’re likely entering a real estate recession, but not across the entire real estate market.”

There is also encouraging news regarding cryptocurrency regulations, as the industry gains further backing against the regulatory actions of the U.S. Securities and Exchange Commission (SEC). On May 9, the U.S. Chamber of Commerce submitted an amicus brief in support of the Coinbase exchange, accusing the SEC of intentionally creating a precarious and uncertain environment.

Additionally, investor optimism is bolstered by the upcoming Bitcoin halving anticipated for April–May 2024, when the reward for miners per block will decrease from 6.25 BTC to 3.125 BTC. On-chain analysis from Glassnode indicated that the number of addresses holding 1 BTC or more reached one million on May 13. Since February 2022, an impressive 190,000 “wholecoiners” have been added.

Despite the recent downturn in Bitcoin’s price, there are sufficient factors and potential catalysts to support a significant bull run in the months ahead. Professional traders are mindful of the liquidation risks tied to futures contracts, leading them to favor option strategies.

Implementing the risk reversal strategy in Bitcoin

Options trading offers investors the chance to benefit from increased volatility or to safeguard against sharp price declines, with these intricate investment strategies, involving multiple instruments, referred to as “option structures.”

Traders can utilize the “risk reversal” option strategy to mitigate losses from unexpected price fluctuations. This strategy allows the investor to be long on call options while financing that position by selling puts. Essentially, this arrangement removes the risk of the asset trading sideways and limits the risk if the asset declines in value.

Profit and loss estimate. Source: Deribit Position Builder

The aforementioned trade is focused solely on June 30 options, but investors can identify similar patterns with varying maturities. At the time of pricing, Bitcoin was trading at $27,438.

Initially, the trader should acquire protection against a downward move by purchasing 2.3 BTC puts (sell) $22,000 option contracts. Next, the trader will sell 2.0 BTC puts (sell) $25,000 option contracts to secure returns above this threshold. Finally, the trader should buy 3.2 calls (buy) $34,000 option contracts for positive price exposure.

Investors are safeguarded down to $25,000

This option structure results in neither a profit nor a loss between $25,000 (down 9%) and $34,000 (up 24%). Consequently, the investor is wagering that Bitcoin’s price on June 30 at 8:00 am UTC will exceed that range while having the potential for unlimited profits and a maximum negative return of 0.275 BTC.

If Bitcoin’s price climbs to $37,250 (up 36%), this investment yields a gain of 0.275 BTC. Furthermore, after a 42% increase to $39,000 within 45 days, net returns amount to 0.41 BTC. In summary, this strategy allows for unlimited gains with a capped loss.

Although there is no initial cost associated with this options structure, the exchange will require a margin deposit of 0.275 BTC to cover the negative exposure.

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 decisions.

This article is intended for general informational purposes and should not be construed as legal or investment advice. The views, thoughts, and opinions expressed herein are solely those of the author and do not necessarily reflect the views and opinions of Cointelegraph.