Bitcoin’s (BTC) price surge towards $28,000 on October 1 was partly driven by uncertainty over the US debt limit. However, US President Joe Biden signed the spending bill just hours before the September 30 deadline, to avoid a government shutdown.
Investors are now wondering if the momentum is still right for cryptocurrencies given that the worst-case political and economic scenario is no longer on the table. However, it should be noted that this bill only provides additional funding for the next 45 days, giving the House and Senate more time to work on their 2024 funding plans.
At first glance, it may be tempting for investors to use futures contracts to buy Bitcoin. However, there is a high risk of liquidation if the price suddenly drops, and it is impossible to predict whether a successful budget discussion in the future will benefit cryptocurrencies.
With the current extension in place, lawmakers now need to find a solution before November 17. According to Margaret Spellings, president and CEO of the Bipartisan Policy Center:
“We cannot continue to postpone our financial health and negotiate the brink of a government shutdown and debt default.”
There is no doubt that although the crisis has been narrowly avoided, the risk of economic recession remains. The US Federal Reserve is struggling with persistent inflation and rising energy prices, factors that pushed the S&P 500 index to its lowest level in 110 days and pushed 10-year Treasury yields to levels not seen since October 2007.
In addition, oil prices rose to $90, registering a 27.5% increase in just three months. This upward pressure on inflation is expected to further restrict economic activity.
On September 27, Minneapolis Federal Reserve Bank President Neel Kashkari I expressed Uncertainty over whether interest rates have been raised enough to combat this price growth.
Bitcoin’s initial reaction does not guarantee upward momentum
Amid all this turmoil, Bitcoin’s value increased, breaking the $28,000 resistance level on October 2. This performance has led investors to expect increased volatility in the cryptocurrency as the next debt ceiling decision approaches.
Professional traders will avoid directional risk given the uncertain outcome of a political debate and opt for the reversal iron butterfly (short), a limited-risk, limited-profit trading strategy.
The prices mentioned were accurate as of October 2, when Bitcoin was trading at $28,326. All options listed expire on October 27, but this strategy can also be adapted to suit different time frames. It is necessary to remember that options have a specific expiration date, which means that the price increase must occur within the specified period.
The recommended market neutral strategy involves selling 5.4 contracts with a $26,000 put options while simultaneously selling 5.4 call options with a $30,000 strike. To complete the trade, one should purchase 5.8 contracts worth $28,000 of call options and an additional 5 contracts worth $28,000 of put options.
While a call option gives the buyer the right to acquire the asset, the seller of the contract assumes potential negative exposure. For complete protection against market fluctuations, the investor must deposit 0.253 BTC (about $7,170), which represents the maximum possible loss.
A conviction of volatility is essential, as risk-reward is reversed
For this investor to make a profit, the price of Bitcoin must be below $26,630 on October 27 (a decrease of 6%) or above $29,280 (an increase of 3.4%). In essence, the trade offers a potentially large profit zone, but the losses are 90% higher than the potential gains if Bitcoin remains stagnant.
The maximum payout is 0.133 BTC (about $3,770). However, if the trader believes volatility is imminent, a 6% move in 24 days seems achievable.
It is important to note that investors have the option to reverse the exercise before the options expire, preferably after a significant movement in Bitcoin prices. To do this, they must buy back the two options they initially sold and sell the two options they originally bought.
This article is for general information purposes and is not intended and should not be taken as legal or investment advice. The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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