How Bitcoin Traders Have Been Making Money Amid Qu…


Bitcoin is currently having a rather quiet season in the markets as the cryptocurrency has gone comatose in a narrow range above $30,000 — less than half the all-time high reached just two months ago.

However, some options traders are busy as ever, taking relatively high-risk strategies to profit from the cryptocurrency’s continued price consolidation. One of those strategies involves putting on “short strangles,” essentially a bet that bitcoin’s price won’t break out anytime soon.

In a Telegram post on June 30, Singapore-based crypto-trading firm QCP Capital said “Our favorite trade continues to be short BTC strangles within the $30,000 to $40,000 range. With psychological resistance at $40,000 and strong support at $30,000, there’s a good chance that BTC trades in this $10,000 range in the near future, which would likely cause implied volatility to collapse.” 

QCP also said this week its conviction about the short strangle has only strengthened, given the lack of market-moving catalysts in the short term. 

“Right now, our trading plan follows the 2018 BTC analog where we expect a dampened trading environment from here to August (short volatility), followed by a rally,” the firm said.

Short strangles involve selling out-of-the-money (OTM) call and put options with the same expiry. OTM calls are ones at strike prices higher than bitcoin’s current level, while OTM puts have strikes lower than bitcoin’s going price. At press time, bitcoin was trading at $33,869. So calls above $33,869 and puts at lower strikes are out-of-the-money. 

Deribit data tracked by Swiss-based Laevitas shows a high concentration of open interest at $30,000 put and $40,000 call expiring on July 30. It means recently executed short strangle trades mainly involved selling July expiry $30,000 put and $40,000 call. 

ALSO READ:  Certainly, several items can affect your credit report and tank your score

Bitcoin options open interest by strike for July 30 expiry Source: Laevitas, Deribit

How Risky is This Bet?

Selling strangles is akin to taking a bearish view on implied volatility – the degree of price turbulence expected over a specific time. The implied volatility has a positive impact on the options price because demand for hedges typically rises during uncertainty. The metric drops during consolidation and picks up during a strong directional move. 

When traders take a short strangle by selling higher strike calls and lower strike puts, they are essentially betting the market will consolidate, leading to a drop in implied volatility and the option’s price. 

A call seller offers insurance against a bullish move above a particular price level and receives compensation or premium for taking the risk. That is the maximum money a call seller can make, and the call buyer can lose. 

Similarly, a put seller offers protection against a bearish move below a particular price level and receives a premium for providing insurance. That is the maximum profit a put seller can make and the maximum loss the buyer may suffer. 

So, when traders sell short strangles, the profit is limited to the extent of the premium received for selling calls and puts; that is, offering protection against bullish and bearish moves. However, the loss can be huge if the market breaks out of the range, charting a strong bullish or bearish move, and call/put buyer claims insurance. 

Let’s consider an example. Assume a trader foresees bitcoin’s continued range of between $30,000 and $40,000 and executes a short strangle on Deribit by selling the July 30 expiry $30,000 put and $40,000 call. 

ALSO READ:  Crypto Markets Plunge As ECOWAS Parliament Voices ...

The $30,000 put is currently drawing a premium of 0.0365 BTC, and the $40,000 put is changing hands at 0.0169 BTC. So, by selling both the strangle writer receives a total premium of 0.0534 ($1,794 at bitcoin’s current price of $33,600). 

Derebit trade
Short strangle simulation on Deribit’s strategy builder Source: Deribit

The trader will retain 0.0534 BTC, or $1,794, if bitcoin remains between $30,000 and $40,000 until July 30. Deribit settles options at 8:00 a.m. UTC. The position will yield a loss if bitcoin trades above $40,000 or below $30,000 on expiry. 

Theoretically, the market can rise to infinity and fall to zero, meaning losses can be in multiples of the max gain, as suggested by the inverted U in the graph below. Derebit tSimulation: Short strangle risk-reward profile via Deribit’s strategy builder Source: Deribit

As Charles M. Cottle, author of “Options Trading: The Hidden Reality,” says in the book: “The ideal situation for a premium [strangle] seller is to go to sleep after initiating the trade and wake up at the expiration with the price of the underlying at the short strike price.” (Or in this case, at $30,000 or $40,000 or anywhere in that range.) 

However, the market never lets the trader, especially an option seller, rest. “Be careful when selling premium,” Cottle noted in the book, saying the market stretches out the trader’s wallet from time to time, causing him to react for protection.

ALSO READ:  Mostly, several things could be detrimental to your credit report and tank your credit rating

For example, if bitcoin rises above $40,000 in the next few days, the premium for the $40,000 call would rise, yielding a loss for the seller. As such, the seller may have to square off the position or buy the cryptocurrency in the spot market or futures market to compensate for the losses in the short call position. 

In other words, selling a strangle and then managing the position is a costly affair best suited to traders or entities with ample capital supply. 

Though a risky bet, short strangle has gotten more attractive as bitcoin’s one-month implied volatility traded significantly higher than its lifetime average and realized volatility following the mid-May sell-off. In other words, the volatility explosion looked overdone, and options appeared relatively costly and ripe to sell. 

Implied volatility is mean-reverting and cyclical in nature: a period of high volatility is followed by low-volatility consolidation.

btc volatilityBitcoin one-month ATM implied volatility Source: Skew

The one-month implied volatility peaked above 140% on May 23. At press time, the gauge is seen at 83%. However, it’s still richer than its lifetime average of 76%, according to data provided by Skew. 

Deribit Chief Commercial Officer Luuk Strijers said these low-volatility strategies are traded occasionally but do not amount to a significant percentage of the exchange’s volume yet. 

!function (f, b, e, v, n, t, s) {
if (f.fbq) return;
n = f.fbq = function () {
n.callMethod ?
n.callMethod.apply(n, arguments) : n.queue.push(arguments)
};
if (!f._fbq) f._fbq = n;
n.push = n;
n.loaded = !0;
n.version = ‘2.0’;
n.queue = [];
t = b.createElement(e);
t.async = !0;
t.src = v;
s = b.getElementsByTagName(e)[0];
s.parentNode.insertBefore(t, s)
}(window, document, ‘script’,
‘https://connect.facebook.net/en_US/fbevents.js’);
fbq(‘init’, ‘3073110239476046’);
fbq(‘track’, ‘PageView’);



Source link

admin

Nigerian Celebrity News and entertainment

Follow Us

Follow us on Facebook Follow us on Pinterest