Bitcoin experienced a significant surge in its price, reaching $28,000 on October 1st. This bullish momentum was partially fueled by the uncertainty surrounding the United States debt limit. However, just hours before the September 30th deadline, U.S. President Joe Biden signed a spending bill, avoiding a government shutdown. This development has led investors to question whether the favorable momentum for cryptocurrencies will continue now that the worst-case political-economic scenario is no longer on the table.
Although the spending bill provides temporary funding for the next 45 days, it merely buys more time for the House and Senate to work on their funding plans for 2024. As a result, lawmakers will need to find a long-term solution before November 17th. Margaret Spellings, the President and CEO of the Bipartisan Policy Center, emphasizes that continually postponing fiscal health and negotiating on the brink of government shutdowns and debt defaults is not a sustainable approach.
Despite narrowly avoiding a crisis, the risk of an economic recession remains. The U.S. Federal Reserve is currently grappling with persistent inflation and rising energy prices, which have pushed the S&P 500 to its lowest point in 110 days and lifted the 10-year Treasury yield to levels not seen since October 2007. Additionally, oil prices have surged to $90, marking a 27.5% gain in just three months. This inflationary pressure is expected to further constrain economic activity.
Within this tumultuous environment, Bitcoin’s value has continued to increase, breaking through the $28,000 resistance on October 2nd. This performance has led investors to anticipate heightened volatility for the cryptocurrency as the upcoming debt ceiling decision approaches. Professional traders, wary of the uncertain outcome of the political debate, may opt for a limited-risk, limited-profit trading strategy known as the reverse (short) iron butterfly.
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In the reverse iron butterfly strategy, traders sell 5.4 contracts of $26,000 put options while simultaneously selling 5.4 call options with a $30,000 strike. To complete the trade, they would buy 5.8 contracts of $28,000 call options and an additional 5 contracts of $28,000 put options. This neutral-market strategy aims to capitalize on limited price movement within a defined range.
It is essential to understand that options have an expiry date, meaning that the price increase must occur during the specified period. As for this particular strategy, the expiry date is October 27th. To protect against market fluctuations, an investor must deposit 0.253 BTC (approximately $7,170), representing the maximum potential loss.
For this investor to profit, Bitcoin’s price must be below $26,630 on October 27th (a decrease of 6%) or above $29,280 (an increase of 3.4%). While the trade offers a potentially substantial profit zone, losses are 90% higher than potential gains if Bitcoin remains stagnant. The maximum payout is 0.133 BTC (roughly $3,770). However, if a trader believes that volatility is imminent, a 6% movement within 24 days appears achievable.
It’s worth noting that investors have the option to reverse the operation before the options expire, preferably after a substantial Bitcoin price movement. This would involve repurchasing the two options initially sold and selling the two options that were originally bought.
In conclusion, while Bitcoin’s price has seen a surge and uncertainty regarding the United States debt limit has diminished, the risk of an economic recession remains. Investors must carefully consider their strategies and assess the potential volatility in the cryptocurrency market. The reverse iron butterfly strategy offers a limited-risk, limited-profit approach, but it is crucial to monitor Bitcoin’s price movement and have a conviction in the expected volatility. As always, it’s essential for investors to conduct thorough research and seek professional advice before making any investment decisions.
