How to play it when BTC price moves up or down 10%

by · May 8, 2023

Here’s how Bitcoin (BTC) traders can profit from whether the price goes up or down 10% within 55 days.

Bitcoin Options: Bracing for Volatility

Traditional market analysts have started calling for a volatility spike due to the debate over the US government debt.

Also, signs of stress from the banking sector surprised investors after the US Dollar Index (DXY), which measures the US dollar against a basket of foreign currencies, hit a 12-month low of 101 on May 4.

Equity and macro analyst Markets & Mayhem released a chart from Deutsche Bank that correlates historical government spending and debt concerns with spikes in stock market volatility.

US Treasury Secretary Janet Yellen has warned that the government could run out of cash by June if Congress fails to raise the debt ceiling. According to the BBC, President Joe Biden has called a meeting with congressional leaders on the matter for 9 May.

Government officials said the overspending is partly due to lower-than-expected income taxes, which are typical of recessionary periods.

Volatility can affect the Bitcoin price, but the direction is unknown

It is worth noting that the volatility indicator neither dictates whether the market has strengthened nor anticipates any crashes.

The index calculation does not take into account capital gains or losses, only changes in direction. Thus, if volatility reaches historically low levels, it only reflects that the asset has shown a low amplitude of daily price swings.

Bitcoin 40-Day Realized Volatility. Source: TradingView

Notice how Bitcoin’s 40-day historical volatility typically doesn’t stay below 40% for long. This information, combined with the traditional markets’ stress caused by the regional banking crisis and the debt ceiling debate, could be the perfect storm for a powerful volatility spike.

While one can take advantage of the expectation of higher volatility in the next couple of weeks, most investors are reluctant to take directional bets, meaning they have no confidence in whether the market will move up or down.

However, there is an option strategy that fits this scenario and allows investors to profit from a strong move on both sides.

The Reverse (Short) Iron Butterfly is a limited risk, limited profit trading strategy. It is important to remember that options have a fixed expiry date, which means that the price change must take place during the defined period.

Profit/loss estimate. Source: Deribit Position builder

The option prices above were taken on May 5, with Bitcoin trading at $29,172. All the options listed are for the June 30 expiration, but this strategy can also be used with a different time frame.

The suggested non-directional strategy consists of selling 9.2 BTC contracts of $26,000 put options while simultaneously selling 12.2 call options with a strike of $33,000. To complete the trade, one should buy 13.5 contracts of $30,000 call options and another 8 contracts of $30,000 put options.

While this call option gives the buyer the right to acquire an asset, the contract seller gets a (potential) negative exposure. To fully protect against market fluctuations, one must deposit 0.90 BTC (approximately $26,250), which represents the investors’ maximum loss.

Conviction is essential, as the risk-reward relationship is reversed

For this investor to make money, Bitcoin’s price would need to be below $27,000 on June 30 (down 7.5%) or above $32,150 (up 10.2%). Essentially, the trade has a hugely profitable area, but loses over double the potential gain if Bitcoin fails to move significantly.

The maximum payout is 0.337 BTC (about $9,830), but if a trader is confident that volatility is just around the corner, a 10% move in 55 days seems quite possible.

Note that the investor can reset the operation before the options expire, preferably right after a strong Bitcoin price movement. All one needs to do is buy back the two options that have been sold and sell the other two that were previously bought.

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.