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How Bitcoin Pro Traders Plan To Reap From Bitcoin’s Eventual Surge Above $20K

source-logo  cryptovibes.com 26 October 2022 23:39, UTC

Traders who think that Bitcoin (BTC) will break past $20,000 could go for this low-risk options strategy to execute a long bullish bet.

Bitcoin entered an Ascending channel in mid-September and has now continued to trade sideways around $19,500. Because of the bullish nature of the technical formation and a plunge in the selling pressure from the troubled miners, analysts expect a price surge in the coming months.

Bitcoin/USD price at FTX. Source: TradingView
Bitcoin/USD price at FTX. Source: TradingView

Independent analyst @el_crypto_prof said that the price of Bitcoin formed a “1-2-3 Reversal-Pattern” on a daily time frame, meaning that $20,000 could turn into strong support soon.

$BTC #Bitcoin

Yes, the price action of $BTC is really boring, isn't it?

But if you look closely, a textbook "1-2-3 Reversal-Pattern" has formed in the last few days, which should finally send Bitcoin above 20k soon. pic.twitter.com/29Wa64XKQa

— 𝕄𝕠𝕦𝕤𝕥𝕒𝕔ⓗ𝕖 🧲 (@el_crypto_prof) October 20, 2022

Fundamental analysts are also attributing this sideways action to troubled Bitcoin-listed mining firms. For instance, Stronghold Digital Mining explained a debt restructuring on August 16 that featured the return of 26,000 miners.

Core Scientific, a public miner, sold 12,000 BTC between May and July, while publicly traded mining firms offloaded 200% of their Bitcoin production. Bitcoin enthusiast @StoneysGhoster believes that the excessive leverage caused forced selling, not the mining activity itself.

Bitcoin is grinding sideways around 20k because public miners are in trouble and have to sell all their bitcoin.

Turns out taking out a bunch of debt was a bad idea.

— StoneysGhost (@StoneysGhoster) October 8, 2022

Irrespective of the base case for Bitcoin’s price recovery above $20,000, investors fear the effect of an eventual stock market crash as the different central banks continue increasing interest rates to limit inflation.

Taking into consideration the constant uncertainty caused by the macroeconomic factors, a strategy that yields gains in the $21,000 to $28,000 range while limiting losses below $19,000 appear to be the most prudent. In that case, options markets offer more flexibility to develop some custom strategies.

It Starts With Selling Put Options For Upward Exposure

To maximize the returns, investors could consider the Iron Condor options strategy, which has been a bit skewed for a bullish outcome. Although the put option offers its buyer the privilege to sell an asset at a fixed price in the future – selling the instrument provides exposure to the price upside.

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

The upside example has been set using the Bitcoin November 25 options at Deribit. To initiate the trade, the buyer needs to short (sell) 1 contract of the $23,000 call and put options. Later, the buyer has to repeat the process for the $25,000 options.

To protect against extreme price movements, a put option at $19,000 has been used. Hence, 2.6 contracts will be essential, subject to the price paid for the remaining contracts.

In the end, if the price of Bitcoin explodes above $32,000, the buyer will have to acquire 1.6 call option contracts to limit the strategy’s possible loss.

The Maximum Profit Is 2X Bigger Than The Possible Loss

Although the number of contracts in the given example strives for a maximum BTC 0.30 ($5,700) gain and a possible BTC 0.135 ($2,560) loss, a majority of the derivatives exchanges accept orders as low as 0.10 contracts. As a result, this strategy yields a net profit if Bitcoin trades between $20,000 and $29,600 (+56%) on November 25.

The maximum net gain happens between $23,000 and $25,000, resulting in a return more than two times higher than the possible loss. Moreover, with 32 days until the expiry date, the strategy gives the holder some peace of mind – unlike futures trading, which comes with an inherent liquidation risk.

cryptovibes.com