A crumbling stock market can create profitable opportunities for Bitcoin traders

Some of the biggest companies in the world are expected to report third-quarter earnings in October, including electric car maker Tesla on October 18, tech giants Meta and Microsoft on October 24, Apple and Amazon on October 26 and Google on October 30. Currently, the possibility of another more severe global economic slowdown on the cards, and weak profits could further increase uncertainty.

Given the unprecedented nature of the US Federal Reserve’s tightening and growing macroeconomic uncertainty, investors fear that corporate profitability will begin to deteriorate. In addition, persistent inflation continues to force companies to cut back on hiring and implement cost-cutting measures.

A strengthening dollar is particularly punishing for US listed companies because their products become more expensive in other countries and the reduced revenue brought in from abroad negatively affects the bottom line. Google, for example, is expected to grow revenue by less than 10%, down from 40% growth in 2021.

The companies that make up the S&P 500 account for a combined value of $32.9 trillion, and crypto investors expect some of those bets to move into Bitcoin (BTC) if earnings season fails to sustain modest growth — signaling that the stock market should continue to perform worse.

On the one hand, traders face pressure from Bitcoin’s correlation to stocks, but on the other hand, BTC’s scarcity can shine when inflation issues arise. This possibly creates a huge opportunity for those betting on a BTC price rally, but extreme caution will also be required for the open positions.

Risk-averse traders can use futures contracts to leverage their long positions, but they also risk liquidation if a sudden negative price movement occurs ahead of the company’s earnings calendar. Consequently, pro traders are more likely to choose options trading strategies such as “long butterfly”.

By trading multiple call (call) options for the same expiration date, traders can achieve gains that are three times higher than the potential loss. This options strategy allows a trader to profit on the upside while limiting losses.

It is important to remember that all options have a set expiry date, so the asset’s price increase must occur during the defined period.

A cautious approach to using call options

Below is the expected return using Bitcoin options for the October 28 expiration, but this methodology can also be applied using different time frames. Although the costs will vary, the overall efficiency will not be affected.

This call option gives the buyer the right to acquire an asset, but the contract seller receives (potential) negative exposure. The “long butterfly” strategy requires a short position using a call option, but the trade is hedged on both sides – limiting exposure.

To initiate execution, the investor buys 13 Bitcoin call options with a $20,000 strike and sells 24 contracts of the $23,000 call. To complete the trade, one would buy 10.5 BTC contracts out of $26,000 call options to avoid losses above such a level.

Derivatives swap price contracts in BTC terms and $19,222 was the price when this strategy was listed.

Using this strategy, any outcome between $20,690 (up 7.6%) and $26,000 (up 35.3%) results in a net profit – for example, the optimal 20% price increase to $23,000 results in a net profit of 1.36 BTC, or $24,782 at today’s level. Meanwhile, the maximum loss is 0.46 BTC or $8,382 if the price on October 28 expiration happens below $20,000.

The “long butterfly” strategy offers a potential profit three times greater than the maximum loss.

Overall, the trade provides a better risk-to-reward outcome than leveraged futures trading, especially considering the limited downside. It certainly looks attractive to those who expect deteriorating business conditions for listed companies.

It is worth highlighting that the only upfront fee required is 0.46 BTC, which is enough to cover the maximum loss.