Whether they like it or not, the U.S. Federal Reserve’s stance on interest rate increases and high inflation is the single most important indicator for determining demand for risky assets among cryptocurrency investors. The Fed increases capital costs in an effort to increase the revenue of fixed-income instruments at the expense of the stock market, real estate, commodities, and cryptocurrencies.
The fact that the Fed schedules its sessions far in advance allows for ample time for preparation by Bitcoin traders. Risk assets traditionally experience high intraday volatility as a result of Federal Reserve policy decisions. But traders can use derivatives instruments to achieve the best outcomes as the Fed modifies interest rates.
The strong correlation between Bitcoin and equities presents traders with additional pressure. The 50-day correlation index versus S&P 500 futures, for instance, has been above 70% since February 7. It is clear that cryptocurrency investors are waiting for the direction of conventional markets. Despite the lack of a cause and effect statement.
It’s also conceivable that Bitcoin’s low emissions will turn out to be advantageous as investors discover Fed has run out of options for reducing inflation. U.S. government’s debt repayments could ultimately exceed $1 trillion per year if interest rates are allowed to rise even further. This gives Bitcoin bulls a great incentive, but those ready to make trades based on interest rate increases must exercise extreme caution.
Risk-takers who want to leverage their positions could gain from purchasing Bitcoin futures contracts. But they also run risk of having their holdings liquidated if there is sharp decline in price before Fed’s decision. Because of this, experienced traders are more apt to use options trading strategies like the skewed iron condor.
Using call options with a fair risk strategy
Investors can achieve gains three times greater than risk of loss by trading numerous call (buy) options with same expiration date. With this options trading approach, a trader can minimize losses while benefiting from gains.
The rise in Bitcoin’s price must occur within the predetermined time frame because all options have a defined expiration date.
Anticipated returns using Bitcoin options are shown below for March 31 expiry. This technique can be used for other time periods as well. The prices may differ, but the overall effectiveness won’t be compromised.
With a call option, buyer has legal right to purchase a commodity, but the contract seller is (potentially) exposed negatively. The iron condor involves selling call and put options with the same strike price and expiration date.
The target profit area, as demonstrated above, is above $23,800, and the worst case situation, should the expiry price on March 31 fall below $23,000, is a loss of 0.217 BTC, or $5,156 at the current exchange rate.
In order to start a transaction, the investor must purchase 6.2 contracts of the $23,000 put option. After that, purchaser must sell 2.1 contracts of the $25,000 call option and 2.2 contracts of the $27,000 call option. Next step for purchaser to sell 2.5 contracts of $25,000 put (sell) option along with 1 contract each of $27,000 put option.
The trader must then buy 3.9 contracts of the $29,000 call option in order to cap losses above the amount.
If Bitcoin trades between $23,800 and $29,000 on March 31, this plan will profit. Net gains peak between $25,000 and $27,000 at 0.276 BTC ($6,558 at today’s prices). But they continue to exceed 0.135 BTC ($3,297 at today’s prices) if Bitcoin trades between $24,400 and $27,950.
If Bitcoin trades below $23,000 on March 31, then investment needed to start this skewed iron condor strategy will be 0.217 BTC, or $5,156. This strategy’s advantage is its large profit target area. Which produces a better risk-to-reward result than leveraged futures trading, particularly when one considers the small risk of loss.
The above opinion is just for the education purpose do your own research before investments and trading..