Original | Odaily Planet Daily
Author | jk
In the recent tumultuous cryptocurrency market, novice investors often face a dilemma: how to seize the volatility caused by major events? How to layout in an uncertain market to capture profit opportunities while effectively controlling risk? To address this situation, we will introduce four options strategies suitable for beginners—long straddle strategy, long strangle strategy, covered call options, and synthetic futures strategy. Each of these strategies has its unique application scenarios, achieving profit goals through different combinations.
Before reading this article, readers need to understand the basic concepts of options. If the concept of options is unclear, you can check here: (What are options?)
1. Long Straddle Strategy
The long straddle strategy refers to simultaneously buying call and put options with the same strike price on the same asset. In a market poised for significant volatility, this strategy can potentially profit regardless of whether the market price moves sharply up or down.
This strategy is suitable for use before major events, such as the release of important economic data, policies, or large events. The market's rise and fall are uncertain, but the market price will certainly experience significant fluctuations.
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 for an option premium of $603, and simultaneously buys a put option with a strike price of $75,500 for an option premium of $678. The total option cost is $603 + $678 = $1,281. Both options expire tomorrow.
Next, we will look at the returns in two hypothetical scenarios after the next day expires:
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 remains at $75,500 on the expiration date, both the call and put options will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire option premium, which is a cost of $1,281.
The above examples all derive from the profits of options exercised at expiration and do not account for profits from selling due to changes in option prices. In simple terms, if the market experiences a large one-sided trend, one side of the option premium will be lost while the other will bring considerable profits. However, if the market remains sideways, the option premium itself is a cost.
The main advantage of the long straddle strategy is its limited risk, with the maximum loss being the cost of purchasing the two options, meaning that even if the market does not fluctuate significantly, larger losses will not occur. Furthermore, this strategy can profit regardless of whether the market rises or falls, as long as the volatility is large enough. 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 high-volatility markets or specific dates with expected high volatility.
2. Long Strangle Strategy
The long strangle strategy involves buying call and put options with different strike prices to reduce costs. Generally, investors buy a put option below the current price and a call option above the current price; this flexibility is very effective in highly volatile markets.
In situations where market uncertainty is high and significant price fluctuations are expected but direction is unclear, the long strangle strategy can help investors capture volatility opportunities at a lower cost.
Let’s look at an example based on real data:
As of the time of writing, the current price of Bitcoin is $75,500. The investor adopts a long strangle strategy, buying a put option with a strike price of $74,000, with an option premium of $165 based on real-time data from OKX, and simultaneously buying a call option with a strike price of $76,000, with an option premium of $414. The total option cost is $165 + $414 = $579. Both options expire the next day.
Next, we calculate the returns in three hypothetical scenarios 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 the total option premium of $579, 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 the option premium of $579, the net profit is $1,500 - $579 = $921.
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price is still $75,500 at expiration, both the put and call options will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire option premium, which is a cost of $579.
As we can see, this strategy has a lower cost because the strike prices of the two options are different, and the option premiums are lower than the long straddle strategy, making it suitable for a 'hundred U War God', but correspondingly, it requires a large price movement to profit. If the price fails to reach either strike price, the investor may face a loss of the option premium. The larger the difference in strike prices, the greater the price movement needed for profitability.
3. Covered Call Options
The covered call options strategy refers to selling a call option while holding the underlying asset, aiming to gain additional income when the market fluctuates slightly or rises moderately. 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 moderately rising or sideways markets, especially for long-term investors who wish to gain additional income from their underlying holdings.
Assuming the investor holds one Bitcoin, currently priced at $75,500. The investor decides to sell a call option with a strike price of $76,500, with an option premium of $263 based on OKX's options data. Thus, the investor earns an additional income of $263 by selling the call option. Both options expire the next day.
Next, let's calculate the returns in three scenarios:
Bitcoin price remains unchanged ($75,500):
If the Bitcoin price is still $75,500 at expiration, below the strike price of $76,500, the call option will not be executed, and the investor can continue to hold Bitcoin while receiving an option premium income of $263. Therefore, the total return 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 executed, and the investor still holds Bitcoin while receiving an option premium of $263. The total return 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 executed, and the investor must sell Bitcoin at the strike price of $76,500. The investor ultimately receives $76,500 in sale income and $263 in option premium, totaling $76,500 + $263 = $76,763. If they were to buy Bitcoin again at this point, there would be a loss of several hundred dollars.
The advantage of this strategy is that investors can obtain additional income (i.e., option premiums) by selling call options, while continuing to hold the underlying position and gaining potential upside when the market price does not exceed the strike price. However, if the price rises significantly above the strike price, the investor must sell the underlying asset at the strike price, potentially missing out on higher upside returns. Overall, this strategy is suitable for investors looking for stable income.
4. Synthetic Futures Strategy
The synthetic futures strategy forms a position similar to holding the underlying asset by buying a call option and simultaneously selling a put option. The synthetic futures strategy can achieve potential returns in highly volatile markets without directly holding the underlying asset.
Let's look at a real data example: According to OKX's spot and options data, the current price of Bitcoin is around $75,500. The investor adopts a synthetic futures strategy by buying a call option with a strike price of $75,500 for an option premium of $718, while selling a put option with a strike price of $75,500, which generates an option premium income of $492. Thus, the investor's net expenditure is $718 - $492 = $226. Both options expire tomorrow.
Next, let's calculate the returns in two hypothetical scenarios after the second day:
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 expenditure 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 is still $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.
As we can see, this strategy is suitable for highly volatile markets and for investors who wish to achieve similar positions without holding the underlying asset, but it requires a large degree of control over price direction. Once it drops, the risk is unlimited; however, if it rises, the potential returns will also be substantial.
Summary
These four strategies each have their advantages and disadvantages, and their applicable scenarios vary. Both the long straddle and long strangle strategies are suitable for situations where significant volatility is expected but direction is unclear, and both have limited losses confined to the option premiums, avoiding unlimited losses. For example, in the recent election and during monthly interest rate announcements, trading short-term options may find profit opportunities from volatility. However, if the market price only fluctuates slightly, both strategies may incur losses on the option premiums.
Relatively speaking, the cost of the long straddle strategy is higher, but it requires lower volatility; while the long strangle strategy is cheaper, it needs a larger price movement to be profitable.
Covered call options are suitable for a moderately rising or flat market, allowing investors to gain additional income by selling options. However, if the price rises significantly, the investor may miss out on potential higher returns by selling the underlying asset at the strike price. This strategy does not incur unlimited losses, but it does limit the investor's potential gains.
Synthetic futures strategies are suitable for highly volatile markets, especially when investors want to create a position similar to holding the underlying asset using options. This strategy may incur unlimited losses, particularly if the market price drops significantly while selling put options, where the investor would need to bear the corresponding losses.
Overall, these four strategies provide different options when market volatility is uncertain. Investors can choose the appropriate strategy based on market expectations and risk tolerance to maximize returns or control risks.
