Bitcoin ‘Short Strangle’ Preferred as Market Signals Near-Term Calm: 10x Research

Bitcoin BTC$70,181.01 defied expectations for significant volatility in August, trading within a range. As market dynamics indicate a continued low-volatility regime in the near term, 10x Research highlights the "short strangle" as an ideal play.

"Given the current dynamics in the bitcoin options market, a short strangle looks well-suited for the next month. With bitcoin trading around $113,000 and an expected range between $95,000 and $125,000, selling an out-of-the-money [September expiry] put near $95,000 alongside an out-of-the-money [September expiry] call near $125,000 provides an opportunity to capture premium," Markus Thielen, founder of 10x Research, said in a report to clients Thursday.

Short strangle involves a simultaneous writing (selling) of out-of-the-money higher strike calls and OTM lower strike puts with the same expiry, positioned equidistant from the underlying asset's spot price.

The strategy is similar to selling insurance against both bullish and bearish moves in exchange for a premium, which represents the maximum profit achievable if the spot price remains between the two strike prices - $95,000 and $125,000 in this case.

Selling options (or strangles) is a common strategy when implied volatility (IV) exceeds realized volatility, as this allows traders to capture richer premiums, and the market is expected to remain relatively stable.

"The strategy works because the implied volatility curve is trading above realized levels, signaling options are overpriced, and the market is unlikely to deliver large moves outside your defined range in the short run," Thielen noted. "The options implied volatility term structure indicates near-term calm."

The implied volatility (IV) term structure is a graphical representation showing how volatility is expected to evolve across different future time horizons. It is typically upward sloping, reflecting increasing uncertainty and risk as the time to expiration lengthens.

Risk-reward profile

BTC needs to continue trading between $95,000 and $125,000 for the suggested strategy to generate profits. The rangebound trading will reduce the demand for OTM calls and puts, thereby draining premium from these options and generating a profit for strangle sellers.

Thielen’s previous recommendation from early August was also a short strangle, involving a $105,000 put and a $130,000 call. This strategy generated a yield of 3.5%.

Note, however, that short strangles carry significant risks, particularly in the event of a sudden spike in volatility, which can lead to substantial losses. Therefore, traders must continuously monitor the position and relevant market variables to manage risk effectively.

Read more: Bitcoin Headed to $190K on Institutional Wave, Research Firm Says