Original | Odaily Planet Daily
Author | jk
In the rapidly changing cryptocurrency market, novice investors often face a dilemma: how to capture the volatility caused by major events? How to position themselves effectively in an uncertain market while seizing profit opportunities and controlling risks? To address this situation, we will introduce four options strategies suitable for beginners—long-short straddle, long-short strangle, covered call, and synthetic futures strategy. Each of these strategies has its unique application scenarios and achieves profit goals through different combinations.
Before reading this article, readers should understand the basic concepts of options. If you are unclear about the concept of options, you can check here: (What are options?)
1. Long Straddle Strategy
The long-short straddle strategy refers to simultaneously buying call options and put options with the same strike price for the same asset. This strategy can potentially profit regardless of whether the market price moves significantly up or down when facing expected large market fluctuations.
This strategy is suitable for use before major events, such as the release of important economic data, policies, or large events. The direction of market movements is uncertain, but significant price fluctuations are expected.
Let's look at an example. As of the time of writing, the current price of Bitcoin is $75,500. According to real-time data from OKX options, the investor buys a call option with a strike price of $75,500, paying an option premium of $603, while also buying a put option with a strike price of $75,500, paying an option premium of $678. The total option costs amount to $603 + $678 = $1,281. Both options expire tomorrow.
Next, let's look at the potential profits from two hypothetical scenarios after expiration the next day:
Bitcoin price drops to $73,000:
If the Bitcoin price drops to $73,000, the held put option with a strike price of $75,500 will have an intrinsic value of $2,500 ($75,500 - $73,000 = $2,500). After deducting the initially paid option premium of $1,281, the net profit is $2,500 - $1,281 = $1,219.
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price is still $75,500 at expiration, both the call option and the put option will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire option premium, which amounts to a cost of $1,281.
The above examples are all derived from profits at option expiration and do not account for profits from selling due to changes in option prices. Simply put, if the market experiences significant one-sided movements, one side's option premium will be lost, while the other will yield considerable profits. If the market moves sideways, the option premium itself is merely a cost.
The main advantage of the long-short straddle strategy is its limited risk, with the maximum loss being only the cost of purchasing both options, meaning there will not be greater losses even if the market does not fluctuate much. Additionally, this strategy can be profitable regardless of market rises or falls, as long as the volatility is sufficient. However, if the market price does not fluctuate enough to cover the option costs, investors may face significant losses, making this strategy more suitable for markets with high volatility or specific dates with expected high volatility.
2. Long Strangle Strategy
The long-short strangle strategy involves buying call and put options with different strike prices to lower costs. Generally, investors buy a put option below the current price and a call option above the current price, and this flexibility is very effective in highly volatile markets.
In situations of significant market uncertainty, where drastic price fluctuations are expected but the direction is unclear, the long-short strangle strategy can help investors capture volatility opportunities at a lower cost.
Let's look at an example based on actual data:
As of the time of writing, the current price of Bitcoin is $75,500. The investor adopts the long strangle strategy, buying a put option with a strike price of $74,000, with an option premium of $165 according to OKX's real-time data, while also buying a call option with a strike price of $76,000, with an option premium of $414. The total option costs amount to $165 + $414 = $579. Both options expire the next day.
Next, we calculate the profits of three hypothetical situations after expiration:
Bitcoin price drops to $73,000:
If the Bitcoin price drops to $73,000, the held put option with a strike price of $74,000 will have an intrinsic value of $1,000 ($74,000 - $73,000 = $1,000). After deducting a total of $579 in option premiums, the net profit is $1,000 - $579 = $421.
Bitcoin price rises to $77,500:
If the Bitcoin price rises to $77,500, the held call option with a strike price of $76,000 will have an intrinsic value of $1,500 ($77,500 - $76,000 = $1,500). After deducting $579 in option premiums, the net profit is $1,500 - $579 = $921.
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price remains at $75,500 at expiration, both the put option and the call option will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire option premium, which amounts to a cost of $579.
It can be seen that this strategy has lower costs because the strike prices of the two options are different, and the option premiums are lower than the long-short straddle strategy, making it suitable for small investments. However, it requires significant price fluctuations to be profitable. If the price does not reach either strike price, the investor may face losses on the option premiums. The larger the gap between strike prices, the greater the price movement needed for profitability.
3. Covered Call
The covered call strategy refers to selling a call option while holding the underlying asset to gain additional income when the market is stable or moderately rising. If the price does not reach the strike price, the investor can retain the underlying asset and earn the option premium; if the price exceeds the strike price, the underlying asset will be sold at the strike price, locking in profits. This strategy is suitable for situations of moderate market increases or sideways consolidation, especially for long-term investors looking to gain additional income from underlying holdings.
Assuming the investor holds one Bitcoin, with the current price at $75,500. The investor decides to sell a call option with a strike price of $76,500. According to OKX's options data, the option premium is $263. Thus, the investor earns an additional income of $263 from selling the call option. Both options expire the next day.
Next, let's calculate the profits in three scenarios:
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price is still $75,500 at expiration, which is below the strike price of $76,500, the call option will not be exercised, allowing the investor to continue holding Bitcoin and earn $263 from option premiums. Therefore, the total profit is $263.
Bitcoin price drops to $75,000:
If the Bitcoin price drops to $75,000 at expiration, which is also below the strike price of $76,500, the call option will not be exercised, and the investor will still hold Bitcoin and earn $263 from option premiums. The total profit remains $263.
Bitcoin price rises to $77,000:
If the Bitcoin price rises to $77,000 at expiration, exceeding the strike price of $76,500, the call option will be exercised, and the investor must sell Bitcoin at the strike price of $76,500. The investor will ultimately receive $76,500 from the sale and $263 from the option premium, bringing the total income to $76,500 + $263 = $76,763. If the investor buys back Bitcoin at this point, there will be a loss of several hundred dollars.
The advantage of this strategy is that investors can earn additional income (i.e., option premiums) by selling call options while maintaining their spot position and benefiting from potential upside gains as long as the market price does not exceed the strike price. However, if the price rises significantly above the strike price, investors must sell the spot at the strike price, potentially missing out on higher upside gains. Overall, this strategy is suitable for those looking for stable income.
4. Synthetic Futures Strategy
The synthetic futures strategy involves buying call options and simultaneously selling put options, creating a position similar to holding the underlying asset. The synthetic futures strategy can achieve potential gains in highly volatile markets without directly holding the underlying asset.
Let's look at an example based on actual data: according to OKX's spot and options data, the current price of Bitcoin is around $75,500. The investor adopts the synthetic futures strategy by buying a call option with a strike price of $75,500, paying an option premium of $718, while simultaneously selling a put option with a strike price of $75,500, earning an option premium of $492. Thus, the investor's net expenditure is $718 - $492 = $226. Both options expire tomorrow.
Next, we calculate the profits in three scenarios:
Bitcoin price rises to $77,000:
If the Bitcoin price rises to $77,000, the held call option with a strike price of $75,500 will have an intrinsic value of $1,500 ($77,000 - $75,500 = $1,500). After deducting the option premium expense of $226, the net profit is $1,500 - $226 = $1,274.
Bitcoin price drops to $74,000:
If the Bitcoin price drops to $74,000, the sold put option with a strike price of $75,500 will have an intrinsic value of $1,500 ($75,500 - $74,000 = $1,500). Since the investor is the seller of the put option, they must bear this loss, plus the initial expenditure of $226, resulting in a final net loss of $1,500 + $226 = $1,726.
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price remains at $75,500 at expiration, both the call and put options will have no intrinsic value, meaning neither option will be exercised. The investor will lose the net expenditure of $226 in option premiums.
It can be seen that this strategy is suitable for highly volatile markets and investors looking to achieve a position similar to holding the underlying asset without holding it, but significant confidence in price direction is needed. If it falls, the risk is unlimited; however, if it rises, the potential gains can also be substantial.
Summary
These four strategies each have their pros and cons, and their applicable scenarios vary. The long-short straddle strategy and the long-short strangle strategy are both suitable for situations where significant volatility is expected but the direction is unclear, and both have limited losses confined to the option premium, meaning there will not be unlimited losses. For example, during the recent elections and monthly interest rate announcement dates, trading short-term options may provide opportunities to profit from volatility. However, if the market price only fluctuates slightly, both strategies will incur losses on the option premium.
Relatively, the long-short straddle strategy has higher costs but lower volatility requirements; the long-short strangle strategy has lower costs but requires larger price movements to profit.
Covered call is suitable for situations where the market is moderately rising or stable, allowing investors to earn additional income by selling options. However, if the price rises sharply, investors must sell the underlying asset at the strike price, potentially missing out on higher potential gains. This strategy does not incur unlimited losses but can limit the investor's potential gains.
The synthetic futures strategy is suitable for highly volatile markets, especially when investors wish to create a position similar to holding the underlying asset through options. This strategy can lead to unlimited loss scenarios, especially when selling put options if the market price falls sharply, resulting in corresponding losses for the investor.
Overall, these four strategies offer different choices in uncertain market volatility. Investors can choose the appropriate strategy based on market expectations and risk tolerance to maximize profits or control risks.
