Was liquidated with Bitcoin futures? Get 3.5x leverage using this options strategy
Bitcoin (BTC) bulls may be disappointed after the $31,000 resistance proved stronger than expected on April 14. However, looking at a broader time frame, Bitcoin has been the best performing asset in 2023, gaining over 74% year-to-date at $29,000.
Positioning for weaker dollar, debt ceiling
It’s worth noting that gold is just 4% behind its all-time high, likely indicating a weaker US dollar as investors raise the chances of a recession and further fiscal turmoil for the world’s largest economy.
Behind the bullish price momentum for Bitcoin is weakness in the US financial system, namely the $100 billion in quarterly net withdrawals at First Republic Bank and the legislative effort to approve an increase to the urgent $31.6 billion national debt ceiling.
For Bitcoin investors, a financial crisis is a net positive effect as it forces the US Federal Reserve to expand its emergency financing programs and remove additional unprofitable long-term debt from the system.
Cryptocurrency traders are uncomfortable with the regulatory environment, and the April 25 statement from the New York Federal Reserve further added to the uncertainty. The policies disclosed could potentially bar USD Coin (USDC) stablecoin issuer Circle’s access to the Fed’s reverse securities repurchase program, the safest vehicle for receiving returns on deposits.
Unfortunately, there is no way to predict how the banking crisis will unfold or the timeline for regulatory actions against exchanges and stablecoin issuers. On the other hand, “easy money” policies are well known to any investor as extremely beneficial to scarce assets.
Such a scenario explains why professional traders have used the bullish Iron Condor strategy to maximize gains if Bitcoin breaks above $32,000 in May with limited risk.
Call and put Bitcoin options to hedge your bet
Buying Bitcoin futures pays off during bull markets, but the problem lies in handling liquidations when the BTC price goes down. This is why professional traders use options strategies to maximize gains and limit losses.
The skewed Iron Condor strategy can make profits above $31,400 by the end of May, while limiting losses if the expiration price is below $31,000. It is worth noting that Bitcoin was trading at $29,730 when the pricing for this model took place.
The call option gives the 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) provides exposure to the price upside.
The Iron Condor consists of selling the call and put options at the same expiration price and date. The example above is set using the May 26 contracts, but it can be adapted for other time frames.
Related: Kraken asks San Francisco court to intervene against IRS claims
Modest 6% Bitcoin price gain needed for profit
As shown above, the profit range target is $31,420 (6% above the current $29,730 price) to $36,000 (21.2% above the current price). To start 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. Then, the buyer must repeat the procedure for the $35,000 options, with the same expiration month.
It is also required to buy 4.8 contracts of the $31,000 put option to protect against any downside. Finally, one must buy 7.8 contracts of the $36,000 call option to limit losses above the level.
This strategy’s net profits peak at 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 at $31,850 and $35,700.
The investment required to open this skewed Iron Condor strategy is the maximum loss – 0.063 BTC or $1,750 – that will occur if Bitcoin trades below $31,000 on May 26.
The advantage of this trade is that a wide target range is covered while at the same time giving a return of 357% against potential loss. Essentially, it provides leverage without the liquidation risk typical of futures contracts.
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.
