This is how traders use the risk reversal options strategy to maintain “safe” exposure to bitcoin price movements.

Bitcoin (BTC) traders seem undecided about their next move and this is reflected in the price swings from $58,400 to $63,400 over the past 14 days. There are some bearish signals from the US regulatory front, but at the same time, Bitcoin exchange-traded funds (ETFs), which have over $1.2 billion in assets under management, have also raised investor expectations.

Bitcoin price in USD on Coinbase. Source: Trade View
A Nov. 5 CryptoQuant report confirmed that whales have had the most selling pressure over the past few days. The on-chain monitoring resource focused on the “Exchange Whale Ratio” – the percentage of earnings from the largest wallets – and showed a significant increase from mid-October to date.

Additionally, on Nov. 1, the U.S. Treasury Department asked Congress to take immediate action to pass legislation to ensure issuers of stablecoins are regulated in payments the same as U.S. banks. In practice, the report recommends issuing stablecoins only through “persons who are insured custodians.”

Institutional asset managers, however, managed to add $2 billion worth of Bitcoin via mutual funds in October. The ProShares Bitcoin Strategy ETF, which officially launched on Oct. 19, generated $1.2 billion in inflows, according to the Oct. 31 CoinShares Flow Report.

Options allow traders to bet on both bullish and bearish movements
Contrary to popular belief, derivatives markets were not built for gambling and excessive leverage. Derivatives trading has been around for over five decades, and in recent years institutional traders have shifted their focus and volume to cryptocurrencies.

The issue made headlines on July 7 when Bloomberg reported a $4.8 million gain on options trading by U.S. House Speaker husband Nancy Pelosi. In a July 2 financial statement, Paul Pelosi announced the exercise of call options to acquire 4,000 shares of Alphabet, Google’s parent company, at an exercise price of $1,200.

Options trading offers a variety of opportunities for investors looking to take advantage of increased volatility, maximize profits if the price stays within a certain range, or protect against sharp price declines. These complex trades involving more than one instrument are called option structures.

How to limit losses and get unlimited profits
For those unfamiliar with options trading, Cointelegraph previously published an article detailing all the pros and cons of options, including advantages over trading futures contracts.

To hedge losses from unexpected price fluctuations, you can use the option risk reversal strategy. The investor benefits from being long the call options, but pays for it by selling the put. Essentially, this setup removes the risk of the stock trading sideways, but introduces significant risk if the asset is trading lower.

Profit and Loss Account. Source: Deribit Position Builder
The above deal focuses solely on December 31st options, but investors will find similar models with different maturities. First, you need to buy downside protection by buying 2.45 BTC put (sell) option contracts for $44,000.

The trader then sells 2 BTC of $54,000 put option contracts to generate net income above this level. Eventually buying 2.20 call $85,000 option contracts for positive price action.

This option structure results in neither a gain nor a loss of between $54,000 (down 11.5%) and $85,000 (up 39%). In this case, the investor is betting that the price of Bitcoin will break above this range at 8:00 AM UTC on December 31st, while receiving an unlimited profit and a maximum loss of 0.455 BTC.

There is no cost to this option structure, but the exchange requires a margin deposit to cover potential losses. Keep in mind that the minimum trade in options on most derivatives exchanges is a contract of 0.10 BTC.

The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risk. You should do your own research when making a decision.

Source: CoinTelegraph

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