Bitcoin seems to be struggling at the $ 58,000 level, leading some traders to fear that a more significant correction could take place.
While the performance of Bitcoin (BTC) was incredibly strong in 2021, the current gain of 696% and comments from US Treasury Secretary Janet Yellen may suggest that cryptocurrencies are used to finance terrorism may be enough to keep investors a little to feel careful.
Reducing open position sizes is usually the method most investors use to reduce exposure, but another way to manage risks is to use BTC option contracts to provide protection. Buying a put (sell) option is the easiest way, but it is very expensive given the current high volatility scenario.
For example, a put option on March 26 with a strike of $ 56,000 trades at $ 5,300, and its holder will only benefit if BTC trades less than $ 50,700 within 32 days. That would be 12% below the current price of $ 57,500. These protection costs depend on the number of days until the expiration and the implied volatility, or the expectation of a trader for significant price fluctuations.
By using call options (buy) and sell (sell), a trader can create strategies to reduce these costs. There are endless possibilities, but let’s focus on a cheap clumsy option.
Protective seats can make a profit on the downside
This clumsy strategy consists of buying a protective pit to take advantage of the downside, while at the same time selling the call options at higher strikes. These additional trades will cover the cost of the put option, but will result in losses if BTC exceeds a certain threshold.
The above trade consists of the purchase of 1 BTC contract from the March 26 put option with a strike of $ 56,000, while 1 BTC contract of the call option from March 26 with a strike of $ 64,000 is sold.
As the estimate above shows, the end result is between $ 56,000 and $ 64,000 neutral. The trader will not suffer any losses, but will also not benefit from the strategy. On the other hand, if BTC drops to $ 46,000, or by more than 20% from $ 57,500, the contract holder will make $ 10,200 profit.
For the trader to incur a loss of $ 5,000, BTC must reach $ 69,000 on March 26, which equates to a profit of 20% of the current price. Therefore, although it is a bearish strategy, traders will only suffer losses above $ 64,000, or 11% above the current price level.
This strategy provides a good risk reward for those seeking adverse protection. In addition, there is zero advance involved for those trades, other than the margin or deposit requirements.
The views and opinions expressed here are only those of the outhor and does not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You must do your own research when making a decision.