Bullish on Bitcoin but afraid of futures liquidations? Here is how pro traders use options to cast safer bets.
Bitcoin (BTC) bulls were hopeful that the Nov. 21 dip to $15,500 would mark the cycle bottom, but BTC has not been able to produce a daily close above $17,600 for the past eighteen days.
Traders are clearly uncomfortable with the current price action and the confirmation of BlockFi’s demise on Nov. 28 was not helpful for any potential Bitcoin price recovery. The cryptocurrency lending platform filed for Chapter 11 bankruptcy in the United States a couple of weeks after the firm halted withdrawals.
In a statement sent to Cointelegraph, Ripple’s APAC policy lead Rahul Advani said he expects the FTX exchange bankruptcy to lead to greater scrutiny on crypto regulations.” Following the event, several global regulators pledged to focus on developing greater crypto regulation.
Unfortunately, there is no way to know when investors’ sentiment will improve and trigger a new bull run. Despite this, for traders who believe BTC will reach $20,000 by Dec. 30, there is a low-risk options strategy that could yield a decent return with limited risk.
How pro traders use the bullish Iron Condor strategy
Buying Bitcoin futures pays off during bull markets, but the issue lies in dealing with liquidations when BTC price goes down. This is why pro traders use options strategies to maximize their gains and limit their losses.
The bullish skewed Iron Condor strategy can maximize profits near $21,000 by the end of 2022 and it limits losses if the expiry price is below $18,000. It is worth noting that Bitcoin traded at $16,168 when the pricing for this model happened.
The call option gives its holder the right to acquire an asset at a fixed price in the future. For this privilege, the buyer pays an upfront fee known as a premium.
Meanwhile, the put option allows its holder to sell an asset at a fixed price in the future, which is a downside protection strategy. On the other hand, selling this instrument (put) offers exposure to the price upside.
The Iron Condor consists of selling the call and put options at the same expiry price and date. The above example has been set using the Dec. 30 contracts, but it can be adapted for other timeframes.
As shown above, the target profit area is $18,350 to $24,000. To initiate the trade, the investor needs to short (sell) 2 contracts of the $20,000 call option and two contracts of the $20,000 put option. Then, the buyer must repeat the procedure for the $22,000 options, using the same expiry month.
Buying 5.8 contracts of the $18,000 put option to protect from an eventual downside is also required. Lastly, one needs to purchase 5.3 contracts of the $24,000 call option to limit losses above the level.
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This strategy yields a net gain if Bitcoin trades between $18,350 and $24,000 on Dec. 30. Net profits peak at 0.485 BTC ($7,860 at current prices) between $20,000 and $22,000, but they remain above 0.10 BTC ($1,620 at current prices) if Bitcoin trades in the $18,350 and $23,600 range.
The investment required to open this Iron Condor strategy is the maximum loss, hence 0.103 BTC or $1,670, which will happen if Bitcoin trades below $18,000 on Dec 30. The benefit of this trade is that a wide target area is covered while providing a 475% return versus the potential loss.
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This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.