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

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

Bitcoin bulls may have been disappointed on April 14 when the resistance level of $31,000 proved too strong. However, on a broader time frame, Bitcoin (BTC) has been the best-performing asset in 2023, with a gain of over 74% year-to-date at $29,000.

Positioning for Weaker Dollar and Debt Ceiling

It is worth noting that gold is only 4% away from its all-time high, which may indicate a weaker United States dollar as investors increase the odds of recession and further fiscal turmoil for the world’s biggest economy.

The bullish price momentum for Bitcoin can be attributed to the weakness in the U.S. financial system, specifically, the $100 billion in quarterly net withdrawals at First Republic Bank, and the legislative effort to approve an increase to the national debt ceiling.

For Bitcoin investors, a financial crisis can be 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 concerned about the regulatory environment, and the April 25 statement from the New York Federal Reserve has only added to the uncertainty. The guidelines disclosed could potentially hinder USD Coin (USDC) 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.

Such a scenario is 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 can be profitable during bull markets, but the issue lies in dealing with liquidations when BTC’s 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. Bitcoin has traded at $29,730 when this model was priced.

Bitcoin options iron condor strategy returns. Source: Deribit Position Builder

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

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

The iron condor strategy consists of selling the call and put options at the same expiry price and date. The above example uses the May 26 contracts, but it can be adapted for other time frames.

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 range 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 three contracts of the $33,000 put option. Then, the investor 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. Finally, the investor needs to purchase 7.8 contracts of the $36,000 call option to limit losses above that 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 it covers a wide target area while providing a potential 357% return versus the potential loss. Essentially, it provides a leverage opportunity without the liquidation risks typical of futures contracts.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their research when making a decision.