It’s turning out to be a boring summer for directional traders in the bitcoin market: The cryptocurrency has gone comatose in a narrow range above $30,000, less than half the all-time high reached just two months ago.
But some options traders are busy as ever, taking relatively high-risk strategies to profit from the cryptocurrency’s continued price consolidation. One of those strategies involves putting on “short strangles,” essentially a bet that bitcoin’s price won’t break out anytime soon.
“Our favorite trade continues to be short BTC strangles within the $30,000 to $40,000 range,” Singapore-based QCP Capital, said in a Telegram post on June 30. “With psychological resistance at $40,000 and strong support at $30,000, there’s a good chance that BTC trades in this $10,000 range in the near future, which would likely cause implied volatility to collapse.”
QCP said this week its conviction about the short strangle has only strengthened, given the lack of market-moving catalysts in the short term.
“Right now, our trading plan follows the 2018 BTC analog where we expect a dampened trading environment from here to August (short volatility), followed by a rally,” the firm said.
Short strangles involve selling out-of-the-money (OTM) call and put options with the same expiry. OTM calls are ones at strike prices higher than bitcoin’s current level, while OTM puts have strikes lower than bitcoin’s going price. At press time, bitcoin is trading near $33,600. So calls above $33,600 and puts at lower strikes are out-of-the-money.
Deribit data tracked by Swiss-based Laevitas shows a high concentration of open interest at $30,000 put and $40,000 call expiring on July 30. It means recently executed short strangle trades mainly involved selling July expiry $30,000 put and $40,000 call.
“It’s the most popular trade right now,” said Pankaj Balani, CEO of Delta Exchange. “For July, open interest remains highest for $30,000 strike puts,and $40,000 strike calls as traders write this range to collect the premiums.” Selling is referred to as writing in options parlance.
A risky bet?
Selling strangles is akin to taking a bearish view on implied volatility – the degree of price turbulence expected over a specific time. The implied volatility has a positive impact on the options price because demand for hedges typically rises during uncertainty. The metric drops during consolidation and picks up during a strong directional move.
When traders take a short strangle by selling higher strike calls and lower strike puts, they are essentially betting the market will consolidate, leading to a drop in implied volatility and the option’s price.
A call seller offers insurance against a bullish move above a particular price level and receives compensation or premium for taking the risk. That is the maximum money a call seller can make, and the call buyer can lose.
Similarly, a put seller offers protection against a bearish move below a particular price level and receives a premium for providing insurance. That is the maximum profit a put seller can make and the maximum loss the buyer may suffer.