Afraid to buy the dip? Bitcoin options provide a safer way to ‘go long’ from $38K

May 3, 2022 Alex Rustok

The last time Bitcoin (BTC) traded above $50,000 was Dec. 27, 2021. Since then, four months have passed, but traders seem somewhat optimistic that inflation has hit the necessary threshold to trigger cryptocurrency adoption.

In theory, the 8.5% inflation in the United States means that every five years, the prices increase by 50%. This essentially turns $100 into $66 by slashing 33% of the dollar’s purchasing power.

The U.S. Federal Reserve FOMC meeting is expected to rule on the interest rates on May 4, but more importantly, the FED is expected to announce a program to offload part of its $9 trillion balance sheet. Thus, instead of supporting debt and mortgage markets, the U.S. Central Bank will likely sell $95 billion worth of these assets every month.

The consequences could be severe and risk markets have priced in such a scenario. For instance, the Rusell 2000 mid-capitalization stock market index is down 16.5% year-to-date in 2022. Similarly, as measured by the MSCI China index, the Chinese stock market is currently facing a 20% correction year-to-date.

There is no way to know what will trigger a Bitcoin bull run, but a report by Glassnode on April 18 has detected “a large amount of coin supply” accumulating between $38,000 and $45,000. For traders who believe BTC will reach $50,000 by July, there is a low-risk options strategy that can be used to cast a long bullish bet.

The skewed ‘iron condor’ has a limited downside

Following the whales and large investors usually pays off, but most traders are looking for ways to maximize gains while also limiting losses. For example, the skewed “iron condor” maximizes profits near $50,000 by July by limiting losses below $38,000.

Bitcoin options Iron condor skewed strategy returns. Source: Deribit Position Builder

The call option gives the buyer the right to acquire an asset at a fixed price in the future and the buyer pays an upfront fee known as a premium for this privilege.

On the other hand, the put option provides its buyer the privilege to sell an asset at a fixed price in the future — a downside protection strategy. Meanwhile, selling this instrument offers exposure to the price upside.

The iron condor consists in selling both the call and put options at the same expiry price and date. The above example has been set using the BTC July 29 options.

The profit area lies between $40,500 and $60,500

To initiate the trade, the investor needs to short 1 contract of the $44,000 call option and another 1.4 contracts of the $44,000 put option. Then, the buyer needs to repeat the procedure for the $50,000 options, using the same expiry month.

To protect from an eventual downside, one should buy 3.46 contracts of the $38,000 put option. Lastly, one should buy 1.3 contracts of the $70,000 call option to limit losses above the level.

This strategy yields a net gain if Bitcoin trades between $40,500, 4% above the current $38,900 price, and $60,500 on July 29. Net profits peak at 0.33 BTC at $50,000, but remain above 0.21 BTC between $43,200 and $53,400.

Meanwhile, the maximum loss is 0.21 BTC in either extreme if, on July 29, Bitcoin price trades below $38,000 or above $70,000, both of which seem rather unlikely.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.