Got liquidated with Bitcoin futures? Get 3.5x leverage using this options strategy


Bitcoin (BTC) bulls might be disappointed after the $31,000 resistance proved stronger than expected on April 14. However, looking at a broader time frame, Bitcoin has been the best-performing asset in 2023, gaining over 74% year-to-date at $29,000.

Positioning for weaker dollar, debt ceiling

It is worth noting that gold is merely 4% behind its all-time high, likely indicating a weaker U.S. dollar as investors increase the odds of recession and further fiscal turmoil for the world’s biggest economy.

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Behind the bullish price momentum for Bitcoin are the weakness in the U.S. financial system, namely the $100 billion in quarterly net withdrawals at First Republic Bank and the legislative effort to approve an increase to the urgent $31.6 billion national debt ceiling.

For Bitcoin investors, a financial crisis is a net positive as it forces the U.S. Federal Reserve to expand its emergency funding programs and take out additional unprofitable long-term debt from the system.

Cryptocurrency traders are uncomfortable with the regulatory environment, and the April 25 statement from the New York Federal Reserve further added to the uncertainty. The guidelines disclosed could potentially hinder the USD Coin (USDC) stablecoin issuer Circle’s access to the Fed’s securities reverse-repurchase program, the safest vehicle to get yield on deposits.

Unfortunately, there is no way to predict how the banking crisis will unfold or the timeline for regulatory actions against exchanges and stablecoin issuers. On the other hand, “easy money” policies are well known to every investor as extremely beneficial for scarce assets.

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Such a scenario explains why professional traders have been using the bullish Iron Condor strategy to maximize gains if Bitcoin breaks above $32,000 in May with limited risk.

Call and put Bitcoin options to hedge the bet

Buying Bitcoin futures pays off during bull markets, but the issue lies in dealing with liquidations when BTC price goes down. This is why pro traders use options strategies to maximize their gains and limit their losses.

The skewed Iron Condor strategy can yield profits above $31,400 by the end of May while limiting losses if the expiry price is below $31,000. It is worth noting that Bitcoin traded at $29,730 when the pricing for this model took place.

Bitcoin options Iron Condor strategy returns. Source: Deribit Position Builder

The call option gives its holder the right to acquire an asset at a fixed price in the future. For this privilege, the buyer pays an upfront fee known as a premium.

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Meanwhile, the put option allows its holder to sell an asset at a fixed price in the future, which is a downside protection strategy. On the other hand, selling this instrument (put) offers exposure to the price upside.

The Iron Condor consists of selling the call and put options at the same expiry price and date. The above example has been set using the May 26 contracts, but it can be adapted for other timeframes.

Related: Kraken asks San Francisco court to intervene against IRS demands

Modest 6% Bitcoin price gain needed for profits

As depicted above, the target profit area is $31,420 (6% above the current $29,730 price) to $36,000 (21.2% above the current price). To initiate the trade, the investor needs to short (sell) 1.5 contracts of the $33,000 call option and 3 contracts of the $33,000 put option. Then, the buyer must repeat the procedure for the $35,000 options, using the same expiry month.

Buying 4.8 contracts of the $31,000 put option to protect from an eventual downside is also required. Lastly, one needs to purchase 7.8 contracts of the $36,000 call option to limit losses above the level.

This strategy’s net profits peak at 0.225 BTC ($6,685 at current prices) between $33,000 and $36,000, but they remain above 0.063 BTC ($1,750 at current prices) if Bitcoin trades in the $31,850 and $35,700 range.

The investment required to open this skewed Iron Condor strategy is the maximum loss — 0.063 BTC or $1,750 — which will occur if Bitcoin trades below $31,000 on May 26.

The benefit of this trade is that a wide target area is covered while providing a 357% return versus the potential loss. In essence, it provides a leverage opportunity without the liquidation risks typical from futures contracts.

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.

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Author: Marcel Pechman

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