Option Strategy: Time to Open a Straddle

BTC or ETH you make your choice

Introduction

Options become a hot topic in crypto. Volumes are skyrocketing on Deribit and new initiatives have flourished in the DeFi ecosystem.

Nevertheless, volatility has significantly decreased over the past few months on BTC and ETH.

Today, we explain why it might be a good time to buy a straddle on BTC and ETH to bet on a big move coming in neither direction. Crypto are never “stable” for a long time.

Today we explain how to buy a long straddle and why.

For those with no knowledge on options, we advise you to read our first article dedicated to strategies to short ETH via futures or options, here. We explain what are options with few examples.

We have also discussed two option strategies, namely covered callshere and cash covered puts, here.

What is a Straddle?

A long straddle is an option strategy where you are required to buy a put and a call with the same strike price and the same expiry date.

If you buy a straddle, you bet that the underlying asset (BTC or ETH) will move by a big margin but you are unsure about the direction.

Example:

Two days ago, you dreamed about a BTC priced at $5,000.

Yesterday, you had another sweat dream but you saw BTC at $15,000.

Today, BTC is at $9,400 in the market and you do believe your dream will come true but are still unsure about which one.

So you open a straddle and simultaneously buy a put and a call with strike price at $9,500 (the closest strike price compared to current market price and the lowest implied volatility).

Requirements

  • Buy a put option with strike price $9,500 expiring on July 31

  • Buy a call option with strike price $9,500 expiring on July 31

  • BTC current price: $9,400.

  • Total cost: $972 USD ($505 + $467, taking the ask price of both options).

Here is the PNL associated with the straddle.

So you will make money if Bitcoin moves away from the strike price ($9,500).

For example if, by July 31 (expiry date), Bitcoin moves to:

  • $8,000: you make ~$700 USD.

  • $7,000: you make ~$1,800 USD.

  • $5,000: you make ~$4,000 USD.

  • Between $8,600 and $10,600, you lose money in total because the premiums of the two options you bought, are worth more than the differential in price at expiry date.

  • $11,000: you make ~$400 USD.

  • $15,000: you make ~$4,000 USD.

Why Execute This Strategy Right Now?

Implied volatility is relatively low at the moment.

Implied volatility decreased over time so it is currently cheaper to open a straddle with one month until expiry than before, ceteris paribus.

Indeed lower implied volatility means cheaper options. Remember the following rule:

The higher the implied volatility, the more expensive the option.

Pros & Cons

Pros

  1. You bet on a big move coming either way, up or down.

  2. You have unlimited potential profit.

  3. You have limited downside. Your downside is limited to the premium you paid for the call and put option.

  4. You benefit from an increase of implied volatility going forward.

Cons

  1. You pay a fat premium to open the position: one for the call and one for the put option.

  2. You suffer from the time decay (theta). Your options are worth less with the passing of time.

  3. The big move has to happen before the expiry date.

That’s it. Now you can play with straddles. Any questions? Contact us on Twitter. DMs are open.

For everything related to options, we do recommend to use Deribit. They are transparent and the most liquid exchange for options trading on BTC and ETH. If you use our ref link, you will get a 10% discount on fees paid.

Click here

Thanks for reading,

Secret Salsa


Questions?

Please contact us via Twitter: @SecretSalsa_


Disclaimer

You understand that no content published on this website or on our social media channels constitute a recommendation to buy or sell any security or cryptocurrency. You acknowledge that the content of this newsletter is for informational purposes only and does not constitute investment advice. Investment in cryptocurrency involves large risks and you are solely responsible of your investment decisions and should consult a financial professional to assess your own personal and financial situation. Secret Salsa Crypto Ideas’ newsletter is not a registered investment advisor or an investment company.