Bitcoin

This is how professional traders use options to benefit from Bitcoin price corrections

Bitcoin (BTC) appears to be struggling at the $ 58,000 levelThis leads some traders to fear that a more significant correction could take place.

While BTC’s performance was incredibly strong in 2021, it is currently up 696%. and US Treasury Secretary Janet Yellen’s comments that cryptocurrencies are being used to fund terrorism may be enough to make investors a little suspicious.

Reducing the size of open positions is typically the method most investors use to reduce exposure Another way to control risk is to use option contracts on BTC to protect yourself. Buying a put option is the easiest way to go, but it’s quite expensive taking into account the current scenario with high volatility.

This is how professional traders use options to benefit from Bitcoin price corrections
This is how professional traders use options to benefit from Bitcoin price corrections

For example, A March 26 put option with a strike of $ 56,000 will trade at $ 5,300 and its holder would only benefit if BTC traded below $ 50,700 within 32 days. That would be 12% less than the current price of $ 57,500.. These protection costs depend on the number of days until expiration and the implied volatility or the expectation of traders with significant price fluctuations.

By using call and put options, a trader can develop strategies to reduce these costs. The options are endless, but for now we’re focusing on an affordable one for bass players.

Protection puts can lead to a downside profit

This bearish strategy is to buy a protection put option for a lower profit while selling call options at a higher price. These additional operations cover the cost of the put option, but incur losses if BTC exceeds a certain threshold.

Profit and Loss Estimation. Source: Deribit Position Builder

The above operation consists of The purchase of 1 BTC contract of the March 26th put option with a strike of $ 56,000 while selling 1 BTC contract of the March 26th call option with a strike of $ 64,000.

As the above estimate shows The bottom line between $ 56,000 and $ 64,000 is neutral. The trader would not suffer losses but would not benefit from the strategy either. Conversely, if BTC fell from $ 57,500 to $ 46,000, or more than 20%, the contract holder would benefit from $ 10,200.

In order for the trader to suffer a loss of $ 5,000, BTC must hit $ 69,000 on March 26thThis corresponds to a profit of 20% from the current price. Although it is a bearish strategy, Traders would only suffer losses above $ 64,000, 11% above the current price level.

This strategy offers a good risk / reward balance for those seeking protection from falls.. Also, there is nothing to do in these stores other than margin or security requirements.

The positions and opinions expressed here are exclusively those of darerTO and do not necessarily reflect the views of Cointelegraph. Every investment and operation involves risks. You must do your own research when making a decision.

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