Bitcoin options: How to play it when BTC price moves up or down 10%

Here’s how Bitcoin (BTC) traders can profit whether its price move up or down 10% within 55 days.

Bitcoin options: Bracing for volatility

Traditional market analysts have started calling for a volatility spike due to the U.S. government debt discussion.

Moreover, signs of stress coming from the banking sector took investors by surprise after the DXY index, which measures the U.S. dollar against a basket of foreign currencies, reached its lowest level in 12 months at 101 on May 4.

Stock market and macro analyst Markets & Mayhem posted a chart from Deutsche Bank that correlates historical government spending and debt concerns with spikes in the stock market volatility.

Volatility could rise into a government debt debacle as the kabuki theater carries on

Source: Deutsche pic.twitter.com/fmJVKvUZvc

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

U.S. Treasury Secretary Janet Yellen has warned that the government may run out of cash by June if Congress fails to raise the debt ceiling. According to the BBC, President Joe Biden has called a meeting of congressional leaders on the issue for May 9.

Government officials said the overspending is partly due to lower-than-expected income tax receipts, which are typical of recession periods.

Volatility could impact Bitcoin price, but direction unknown

It is worth noting that the volatility indicator neither dictates whether the market has been gaining strength nor anticipates eventual crashes.

The index calculation does not account for price gains or losses, only directional changes. Thus, if the volatility reached historical low levels, it merely reflects that the asset has been displaying a low amplitude of daily price fluctuations.

Bitcoin 40-day realized volatility. Source: TradingView

Notice how Bitcoin’s 40-day historical volatility does not usually remain below 40% for long. That information, coupled with the traditional markets’ stress caused by the regional banking crisis and the debt ceiling discussion might be brewing the perfect storm for a sharp volatility spike.

While one can benefit from the expectation of higher volatility for the next couple of weeks, most investors are unwilling to take directional bets, meaning they have no confidence in whether the market will move up or down.

However, there is an options strategy that fits this scenario and allows investors to profit from a strong move on either side.

The reverse (short) iron butterfly is a limited-risk, limited-profit options trading strategy. It’s important to remember that options have a set expiration date, meaning the price change must happen during the defined period.

Profit/Loss estimate. Source: Deribit Position Builder

The option prices above were taken on May 5, with Bitcoin trading at $29,172. All options listed are for the June 30 expiry, but this strategy can also be used using a different time frame.

The suggested non-directional strategy consists of selling 9.2 BTC contracts of the $26,000 put options while simultaneously selling 12.2 call options with a $33,000 strike. To finalize the trade, one should buy 13.5 contracts of $30,000 call options and another 8 contracts of $30,000 put options.

While this call option gives the buyer the right to acquire an asset, the contract seller gets a (potential) negative exposure. To fully protect from market oscillations, one must deposit 0.90 BTC (roughly $26,250), representing the investors’ maximum loss.

Conviction is essential, as the risk-reward ratio is reversed

For this investor to profit, one needs Bitcoin’s price to be below $27,000 on June 30 (down 7.5%) or above $32,150 (up 10.2%). In essence, the trade has a hugely profitable area, but loses over twice the potential gain if Bitcoin fails to move either way considerably.

The maximum payout is 0.337 BTC (roughly $9,830), but if a trader is confident that volatility is right around the corner, a 10% move in 55 days seems quite feasible.

Notice that the investor can revert the operation before the options expiry, preferably right after a strong Bitcoin price move. All one needs to do is buy back the two options that have been sold and sell the other two that were previously bought.

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.

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