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Traders earn money by selling “strangles”

By
Redakcja
-
5 min reading

A strangle is seen as a promise that bitcoin’s price won’t blow up in the near future. Directional traders in the Bitcoin market. The cryptocurrency has gone senseless in a narrow range higher than $30,000, less than half the all-time high reached just two months ago.

A strangle is seen as a promise that bitcoin’s price won’t blow up in the near future. Directional traders in the Bitcoin market. The cryptocurrency has gone senseless in a narrow range higher than $30,000, less than half the all-time high reached just two months ago. Some of the option traders are occupied and are accepting relatively high-risk strategies to profit from the cryptocurrency’s on-going price combination. One of these strategies are concentrated on placing “short strangles,” which is treated as a venture 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. “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 belief about the short strangle has only gotten stronger considering the shortage 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 consists of selling-out-of-the-money (OTM) call and place options with the exact same expiry. OTM calls are usually the ones which strikes prices higher than Bitcoin’s present level, on the other hand OTM places strikes lower than Bitcoin’s going price. During press time, Bitcoin is trading near $33,600 and puts at lower strikes are out-of-the-money. Deribit data was recently tracked by swiss-based Laevitas which notifies a high concentration of open interest at $30,000 put and $40,000 call expiring on July 30. This proves that the recently executed short strangle trades mainly focused on selling within the 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 mentioned as writing in options parlance. Selling strangles is similar to accepting a bearish view on implied volatility has a positive effect on the options price due to the high demand for hedges which usually increases during uncertainity. The metric drops during consolidation and picks up during a strong directional move. When traders accept a short strangle by selling higher strike calls and lower strike, they are usually betting the market will merge, leading to a drop in implied volatility and the option’s price. A call seller gives insurance against a bullish move higher than the price level and gets compensation or premium for taking risk. This is the maximum amount of money that a seller can make and the buyer can lose. 

However, a put seller is capable of offering protection against a bearish move below a specific price level and receives a premium for providing insurance. This is the highest profit a put seller can make and the highest loss the buyer will have to go through. Hence, when the traders sell short strangles, the profit is restricted to the point of the premium received for selling calls and puts; which is offering protection against bullish and bearish moves. Which could lead to loss and can be an issue if the market breaks out of the range, showing a strong bullish or bearish move and call/put buyer claims insurance. 

For instance, lets consider a trader predicts bitcoin’s continued range of between $30,00 and $40,000 and carry out a short strangle on Deribit by selling the July 30 expiry $30,000 put and $40,000 call. The $30,000 put is presently withdrawing a premium of 0.0365 BTC, and the $40,000 put is exchanging hands at 0.0169 BTC. Therefore, by selling both the strangle writer receives a total premium of 0.0534 ($1,794 at bitcoin’s present price of $33,600). The trader will get a 0.0534 BTC, or $1,794, if bitcoin stays between $30,000 and $40,000 until July 30. Deribit finishes options at 8:00 a.m UTC. This position will yield a loss if bitcoin trades goes above $40,000 or below $30,000 on expiry. So, generally speaking the market is capable of going higher to infinity and fall to zero which means losses could multiply to the max gain.

“if Bitcoin manages to holf the bottom end of the current range convincingly, then one can expect string range selling activity and implied volatilities getting crushed. The seven-day implied volatility is at 87%, while the realized volatility is at 74%.” Said Balani. Deribit chief commercial officer Luuk Strijers said these low-volatility strategies are traded time-to-time but do not reach to a very important percentage of the exchange’s volume. 



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