How Bullish Bitcoin Traders Cautiously Use Options to Maintain Bitcoin Exposure – News Couple
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How Bullish Bitcoin Traders Cautiously Use Options to Maintain Bitcoin Exposure


Bitcoin (BTC) traders seem hesitant about the next move, and this is reflected in the price swing between $58,400 and $63,400 over the last 14 days. There are some bearish signals coming from the US regulatory front, but at the same time, Bitcoin exchange-traded funds (ETF) with more than $1.2 billion in assets under management boosted investor expectations.

Bitcoin price in US dollars at Coinbase. Source: TradingView

The November 5 CryptoQuant report confirmed that whales have been responsible for most of the selling pressure in recent days. The on-chain monitoring resource has focused its attention on the “whale exchange ratio” – the percentage of inflows from the largest wallets – and has shown a clear increase from mid-October to today.

Moreover, on November 1, the US Treasury urged Congress to act urgently to enact legislation to ensure that issuers of stablecoins are regulated similarly to US banks. In practice, the report recommends that stablecoins should be issued only through “secured entities and depository institutions.”

However, institutional money managers managed to add $2 billion worth of bitcoin through mutual funds in October. According to the CoinShares Flow Report released on October 31, the ProShares Bitcoin Strategy ETF, which was officially launched on October 19, has accounted for $1.2 billion in inflows.

Options allow traders to bet on up and down movements

Contrary to popular belief, derivatives markets are not designed for excessive gambling and leverage. Derivatives trading has been around for more than five decades, and institutional traders have turned their attention – and volume – to cryptocurrencies over the past two years.

The topic became the focus of attention on July 7, as Bloomberg reported a $4.8 million gain in options trading from the husband of Nancy Pelosi, the speaker of the US House of Representatives. In a financial disclosure on July 2, Paul Pelosi reported exercising call options to acquire 4,000 shares of Alphabet, Google’s parent company, at a strike price of $1,200.

Options trading offers different opportunities for investors who seek to profit from increased volatility, maximize gains if the price stays within a certain range, or get protection from sharp price drops. Those complex trades that involve more than one instrument are known as options structures.

How to reduce losses and keep unlimited gains

For those unfamiliar with options trading, Cointelegraph previously published an article detailing all the ins and outs of options, including the benefits over futures trading.

To hedge losses from unexpected price fluctuations, one can use the “risk reversal” options strategy. The investor benefits from being long in call options, but pays for those options by selling the call option. Essentially, this setup removes the risks of trading the stock sideways, but it does have a huge risk if the asset is trading down.

Estimating profit and loss. Source: Deribit Position Builder

The above trade focuses exclusively on December 31st options, but investors will find similar patterns using different maturities. First, one needs to buy protection from a bearish move by buying 2.45 BTC and placing (selling) $44,000 of options contracts.

Next, the trader will sell 2 BTC and put (sell) $54,000 of the options contracts for a net return above this level. Finally, buy 2.20 $85,000 Call (Buy) options for a positive price exposure.

This options structure yields no profit or loss between $54,000 (down 11.5%) and $85,000 (up 39%). In doing so, the investor is betting that the Bitcoin price on December 31 at 8:00 AM UTC will be above that range while gaining exposure to unlimited gains and a maximum loss of 0.455 BTC.

There is no cost associated with this options structure, but the exchange will require a margin deposit to cover potential losses. Keep in mind that the minimum options trading on most derivative exchanges is 0.10 BTC lot.

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