Bitcoin has repeatedly failed to close above the $62,000 level since Aug. 3 and is currently down 11% over the past 30 days. More notably, the cryptocurrency has decoupled from the S&P 500 index, which is up 1% in the same period and only 1% below its all-time high.
Investors expect that risk markets, including Bitcoin, could see significant gains if the Federal Reserve (Fed) cuts interest rates, and professional traders are using BTC options to maximize gains while limiting risks.
A 0.50% interest rate cut could drive risk markets higher, including Bitcoin
Traders are grappling with how to optimize their strategies for a potential Bitcoin price increase while also fearing forced liquidations due to unexpected price swings. Part of the market is already pricing in a 0.50% interest rate cut, making it difficult to predict how markets will react on Sept. 18, despite the potential bullish catalyst.
The price action suggests that positive macroeconomic trends for risk markets have been overshadowed by growing concerns within the cryptocurrency sector. Some argue that Democrat nominee Kamala Harris’s lack of commitment to support the industry has contributed to Bitcoin’s subdued performance.
Gemini exchange co-founder Tyler Winklevoss contended that “Operation Choke Point 2.0 remains in full swing” and that “the Harris crypto ‘reset’ is a scam.” Winklevoss highlighted the Fed’s recent actions against Customers Bank, a crypto-friendly institution, after the Philadelphia Federal Reserve Bank claimed that the bank failed in its Anti-Money Laundering and risk management practices.
Additionally, a US federal court judge sided with the US Securities and Exchange Commission (SEC) after Kraken exchange attempted to dismiss a case. The US District Court in Northern California ruled on Aug. 3 that Kraken might be liable for offering “investment contracts, and therefore securities,” which represents a significant setback for the industry. Even though Bitcoin is not directly affected, investor sentiment has weakened.
However, with the CME FedWatch tool showing a 25% chance of a 0.50% interest rate cut on Sept. 18, many believe that risk-on markets could rally. Instead of taking on the risk of leveraged futures positions, professional traders are turning to options strategies.
‘Risk reversal’ Bitcoin options strategy offers downside protection
Among these complex strategies is the ‘risk reversal’, which hedges against losses from unexpected price swings. In essence, the investor gains from holding call options while paying for them by selling puts. This setup eliminates the risk of the asset trading sideways and provides limited downside risk.
The trade illustrated above focuses on Sept. 20 options, though similar patterns can be applied to different maturities. Bitcoin was trading at $58,923 at the time of pricing.
First, the trader needs to protect against a downside move by purchasing 3.5 BTC put options at $58,000. Then, the trader sells 3.4 BTC put options at $60,000 to net returns above this level. Finally, the trader should buy 3.8 BTC call options at $65,000 for positive price exposure.
This option structure results in neither a gain nor a loss between $60,000 and $65,000. The investor is betting that Bitcoin’s price at 8:00 am UTC on Sept. 20 will be above this range, gaining access to unlimited profits and facing a maximum 0.12 BTC (worth $7k) loss.
If Bitcoin rallies toward $67,100 (a 14% increase), this strategy results in a 0.12 BTC gain, which is also the maximum loss. Furthermore, if BTC gains 20% to $70,700, the strategy returns 0.30 BTC (worth $21.2k), with the upside far exceeding the limited downside. Although there is no initial cost for this options structure, the exchange will require a 0.12 BTC margin deposit to cover the exposure.
