Trader benefits with the “Short Strangle” strategy, while Bitcoin trades with ranges

It’s been a boring summer for active traders in the Bitcoin market. The leading cryptocurrency is now trading in a tight range above $ 30,000, less than half of the all-time high it hit just 2 months ago.

Source: TradingView

But some options traders stay busy and implement relatively risky strategies to take advantage of price consolidation. One of these strategies is to use a “short choke,” which is essentially betting that Bitcoin price won’t break out anytime soon.

Singapore-based QCP Capital said on June 30:

“Our favorite trade is to resell the BTC strangle in the $ 30,000 to $ 40,000 range. With psychological resistance at $ 40,000 and strong support at $ 30,000, there is a good short-term chance of a BTC trade in the $ 10,000 area, which could lead to a collapse in potential volatility.

This week, QCP said its confidence in the Short Strangle will be strengthened due to the lack of any short-term market move catalysts.

“At the moment, our BTC trading plan is following the same signal in 2018. We expect a gloomy trading environment (volatility for short) from here until August, followed by a rally.”

The short strangle strategy involves selling call and put options at a loss (OTM) with the same expiration date. OTM call options are options with an exercise price above the current Bitcoin price, while OTM put options have an exercise price that is below the current Bitcoin price. At the time of writing, Bitcoin is trading at $ 33,672. The call options for USD 33,672 and the put options for the lower strike price are therefore OTM.

According to the Switzerland-based Laevitas platform, Dieibit data shows a high concentration of open interest at USD 30,000 put and USD 40,000 call, which took place on March 30th / 30th. This means that the most recent short strangle trades involved mainly the sale of $ 30,000 put and $ 40,000 call expiring in July.

Bitcoin options OPI at the exercise price when it has expired to enter July 30th | Source: Laevitas, Deribit

Delta Exchange CEO Pankaj Balani said:

“This is currently the most popular transaction. In July, the open interest for put calls at USD 30,000 strike and calls at USD 40,000 strike remains highest as traders write this range to collect spreads. “

One plank risky bet?

Selling a stranglehold is like taking a pessimistic view of potential volatility – the expected level of price increases and decreases over a period of time. Implied volatility has a positive effect on option prices as the demand for hedging often increases in times of uncertainty. This indicator falls during consolidation and rises when there are strong trend movements.

When traders short a strangle by selling a call at a higher strike price and a put at a lower strike price, they are essentially betting that the market will consolidate, creating potential volatility and the price of the option.

The seller of a call insures himself against an upward movement above a certain price and receives compensation or a premium for assuming the risk. It is the maximum amount the call seller can earn and the call buyer can lose.

The seller of a put also offers protection against falling below a certain price and receives a premium for this protection. This is the maximum profit that the seller of the put can make and the maximum that the buyer can lose.

So when traders short the strangle, profits are limited to the spread they get on short calls and put orders; that is, offers protection against bullish and bearish movements. However, the losses can be huge if the market breaks out of a range, indicating a sharp move up or down and call / put buyers claim insurance.

For example, suppose a trader predicts that Bitcoin’s range will persist from $ 30,000 to $ 40,000 and strangles Deribit by placing a put of $ 30,000 and a call of $ 40,000 expiring on July 30th sold.

A put of $ 30,000 currently pays a spread of 0.0365 BTC and a put of $ 40,000 pays 0.0169 BTC. So by selling both, the seller gets a total spread of 0.0534 BTC (about $ 1,794 at a Bitcoin price of $ 33,600).

simulation S.strangle hard to the strategy builder from Deribit | Source: Deribit

Traders still have 0.0534 BTC, or $ 1,794 if Bitcoin is between $ 30,000 and $ 40,000 by July 30. Deribit settles options contracts at 3:00 p.m. (Synthetic Team time). The position will be at a loss if Bitcoin trades above $ 40,000 or below $ 30,000 upon expiry.

The market could theoretically rise to infinity and fall to zero, meaning that the loss is a multiple of the maximum gain, as indicated by the inverted U in the graph below.

simulation HRisk profile – reward S.hot side about the strategy builder from Deribit | Source: Deribit

As Charles M. Cottle, author of “Options Trading: Implicit Reality”, puts it in his book:

“The ideal situation for a strangle seller to take the spread is to fall asleep after initiating a trade and wake up to the strike level on expiry with the price of the underlying asset.” (In this case, at $ 30,000 or $ 40,000 or anywhere in this area).

However, the market never lets traders, especially option sellers, rest.

“Be careful about selling spreads,” notes Cottle in the book, saying that over time the market affects a trader’s wallet, causing them to respond in defense.

For example, if Bitcoin rises above $ 40,000 in the next few days, the spread increases when calling $ 40,000, resulting in a loss for the seller. As a result, sellers may have to cancel their positions or buy cryptocurrencies in the spot or futures markets to cover the losses on the short call.

In other words, selling the stranglehold and then managing the position is an expensive endeavor that is best suited for traders or institutions with a large supply of capital.

Still supported

While it is a risky bet, QCP Capital and other trading firms have been advocating short strangles for a long time. Shillian Tang, chief investment officer of $ 135 million crypto hedge fund LedgerPrime, said last month:

“Selling the call and put or strangle will make a profit if we think the market is consolidating around those levels.”

That’s because Bitcoin’s one-month potential volatility traded well above average during its lifetime, and real volatility after it sold off in mid-May. In other words, sell. The latent volatility is average and cyclical: a period of high volatility followed by a consolidation of low volatility.

Potential volatility of Bitcoin for 1 month at ATMs | Source: Skew

Potential one-month volatility peaked on May 23, at over 140%. At the time of writing, the index is 83%. However, according to Skew, it is still above the lifetime average of 76%.

Bali said:

“If Bitcoin holds the lower end of the current range convincingly, expect strong selling activity in the range and potential volatility. The potential 7 day volatility is 87% while the actual volatility is 74%.

According to Luuk Strijers, Deribit’s chief commercial officer, these low-volatility strategies are occasionally traded but are not yet a significant part of the exchange’s volume.

Minh Anh

According to Coindesk

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