Bitcoin (BTC) price swings may be impossible to predict, but there is a strategy commonly used by professional traders that delivers high returns with minimal costs.
Typically, retailers rely on leveraged futures positions that are highly prone to forced liquidations. However, trading Bitcoin options presents excellent opportunities for investors who want to maximize their profits while limiting their losses.
Using multiple call (buy) options can create a strategy that is six times higher than the potential loss. In addition, these can be used in bullish and bearish conditions, depending on investor expectations.
The regulatory uncertainty surrounding cryptocurrencies has long been a significant setback for investors and this is another reason neutral market strategies have caught the attention of traders since Bitcoin’s rally stalled at $47,000 on March 30.
How to profit in a sideways market?
The long butterfly strategy allows a trader to profit even if the price of Bitcoin remains stable. However, it is important to remember that options have a fixed expiration date. This means that the desired price outcome must occur within a certain period of time.
The Bitcoin options are set for the April 29 expiration, but this strategy can also be used on Ether (ETH) options or any other time frame. At the time of writing, Bitcoin was trading at $47,370 and while costs will vary, their overall efficiency should not be affected.
Profit/loss estimate. Source: Deribit Position Builder
The suggested bullish strategy consists of buying 7.3 BTC call (buy) options with a strike price of $46,000 to take advantage of a price increase. Meanwhile, selling 16 BTC call (buy) options at 50,000 creates negative exposure above that level.
The trader needs to buy 4.8 BTC worth $52,000 call options and 3.9 BTC worth $55,000, offsetting the risk above this price.
The gain can be four times higher than the potential loss
As the above estimate shows, any outcome between $46,700 (down 1.5%) and $53,500 (up 12.9%) yields a net profit. The best possible outcome occurs at $50,000 resulting in a net profit of 0.47 BTC. Meanwhile, the max loss of this strategy is 0.11 BTC if the price trades below $46,000 or above $55,000 on April 29.
The allure of this butterfly strategy is that the trader can make gains that are 6 times greater than the maximum loss. Overall, it provides a much better risk return than leveraged futures trading given its limited downside.
This options trading strategy offers benefits even if the price of Bitcoin remains stable and the only prepayment required is 0.11 BTC, which also reflects the maximum loss.
The views and opinions expressed here are solely those of the writer and do not necessarily reflect the views of Coin-Crypto. Every investment and trading move involves risks. You should do your own research when making a decision.