It’s turning out to be a boring summer for directional traders in the bitcoin market: The cryptocurrency has gone into a coma in a narrow range above $30,000, reaching an all-time high less than half a month ago just two months ago.
But some options traders are as busy as ever, taking relatively high-risk strategies to profit from the cryptocurrency’s continued price consolidation. One of those strategies involves a “short throttle,” essentially a bet that the bitcoin price won’t break anytime soon.
“Our preferred trade is strangling small BTC within the $30,000 to $40,000 range,” Singapore-based QCP Capital said in a Telegram post on June 30. “Psychological resistance at $40,0 and $30,000 But with strong support, there is a good chance that BTC trades in this $10,000 range in the near future, which will likely cause implied volatility to collapse.”
QCP said this week its conviction regarding low stranglehold is only stronger, given the lack of market moves in the short term.
“Right now, our trading plan follows the 2018 BTC analog where we expect a muted trading environment from here to August (little volatility), followed by a rally,” the firm said.
Short strangle involves selling out-of-the-money (OTM) calls and put options with the same expiration. OTM calls are at strike prices higher than bitcoin’s current level, while OTM puts are strike prices lower than bitcoin’s going price. Bitcoin is trading near $33,600 at press time. So puts on calls and short strikes above $33,600 are out of the money.
Deribit data tracked by Swiss-based Levitas shows a high concentration of open interest on $30,000 put and $40,000 calls expiring on July 30. This means the recent low-throat trade executed primarily involved selling the July closing $30,000 put and $40,0 call.
Pankaj Balani, CEO, Delta Exchange said, “It is the most popular trade right now. “For July, open interest remains highest for $30,0 strike puts, and $40,0 strike calls as traders collect premiums for writing this limit.” Selling options is referred to in the language as writing.
A risky bet?
Selling the throat is like taking a bearish view on implied volatility – the degree of price turbulence expected at a specific point in time. Implicit volatility has a positive effect on option price because the demand for hedges typically rises during times of uncertainty. The metric falls 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 price of the option.
A call seller provides insurance against a bullish move above a particular price level and receives compensation or a premium for taking the risk. This is the maximum money a call seller can make, and the call buyer can lose.
Similarly, a put seller provides protection against a bearish move below a particular price level and receives a premium for providing insurance. This is the maximum profit a put seller can make and the maximum loss the buyer can suffer.