Source: BitMEX
Welcome to our weekly Options Alpha series!
Bit has just experienced a significant drop of 10%. Your portfolio has incurred losses, and you may be wondering: "What's next? Should I panic, add more, or trade smartly?"
Options strategies can help manage risk, capitalize on potential rebounds, or generate income. Here are five effective strategies for the post-selloff scenario, with examples, profit-loss analysis, and situational guidance.
1. If you're worried Bit will continue to drop in March... Action: Buy protective put options (your insurance strategy)
Assuming you hold Bit at $89,000, but you're having trouble sleeping due to the possibility of Bit dropping to $75,000 in March. Don't just sit tight - hedge yourself! Buy a put option to lock in a floor price.
Example:
- Bit price: $89,000
- Buy a $85,000 put option (expiry: March 28), with a premium of $3,000.
Why it works:
If Bit crashes to $75,000:
- Your put option pays out $10,000 ($85,000 - $75,000).
- After deducting the $3,000 option premium, you net $7,000. This can be used to buy more Bit at a low price or offset your portfolio losses.
If Bit rises to $100,000:
You only lose the $3,000 option premium, but your spot holding skyrockets. This small price is worth the peace of mind.
Worst case: If Bit stays around $89,000 or only slightly increases, the put option will expire worthless, and you'll lose the $3,000 premium, but your Bit holding may have appreciated. This cost is worth paying for protection and reassurance.
Summary: This is designed for those who are bullish on Bit but concerned about further downside. You don't want to sell your Bit, but you need downside protection. Think of it as paying an insurance premium to sleep soundly.
2. If you think Bit will remain range-bound in the coming weeks... Action: Sell covered call options (monetize the boredom)
Assuming you're stuck with Bit at $89,000, but you don't expect any major moves in the near term. Why not get paid while you wait? Sell call options to earn the option premium.
Example:
- Bit price: $89,000
- Sell a $95,000 call option (expiry: March 28), with a premium of $2,600.
Why it works:
If Bit stays at $89,000:
You earn $2,600. This is a 3% return in 30 days for doing nothing.
If Bit rises to $100,000:
You still profit:
- Sell at $95,000 (gain of $6,000)
- Keep the $2,600 option premium
- Total profit: +$8,600.
Worst case: You miss out on gains above $95,000. But honestly, after a selloff, do you really expect a 20% rally in 30 days?
Summary: This is the "I'll take some free money" strategy. If you're slightly bullish on Bit, or just want to reduce the cost of your holding, this is a perfect choice.
3. If you think Bit will rebound (but not too aggressively)... Action: Bull call spread (cheap participation in the rebound)
You believe Bit has been oversold and expect a 10-20% rebound, but you don't want to take too much risk by buying a naked call option. The bull call spread is a budget-friendly choice.
Example:
- Buy a $85,000 call option, costing $7,200 (expiry: March 28).
- Sell a $90,000 call option, receiving $4,000 (expiry: March 28).
- Net cost: $3,200.
Why it works:
If Bit rises to $90,000:
The net profit is $1,800 ($5,000 spread - $3,200 cost). This is over a 50% return!
If Bit stays below $85,000:
You lose $3,200. But this is much less than the $7,200 cost of a standalone call option.
Break-even point is $88,200 - a 4.8% increase.
Summary: This is for the cautiously optimistic. You don't expect a massive Bit rally, just a modest rebound. Lower risk, better sleep.
4. If you're completely uncertain about Bit's direction (but expect high volatility)... Action: Long straddle (profit from the chaos)
After a selloff, Bit could see a violent rebound or continued decline. If you're willing to bet on volatility, buying both a call and a put option is an option.
Example:
- Bit price: $89,000
- Buy an $88,000 call option and an $88,000 put option (expiry: March 28), for a total cost of $9,000.
Why it works:
If Bit skyrockets to $100,000:
The call option profits $11,000, and after deducting the $9,000 option cost, you net $2,000.
If Bit plummets to $70,000:
The put option profits $19,000, and after deducting the $9,000 option cost, you net $10,000.
Break-even point: Bit needs to move more than 10% in either direction. This is highly likely after a selloff.
Summary: This is the "I don't care about the direction, just the volatility" strategy. Is it risky? Yes. Are the potential returns huge if you get it right? Absolutely.
5. If you think the selloff has been overdone... Action: Sell a put spread (bet on stability)
You believe the panic has caused the selloff, and Bit will stabilize or rebound. Sell a put spread to earn the option premium and define your risk.
Example:
- Sell a $85,000 put option, receiving $2,500 (expiry: March 28).
- Buy a $80,000 put option, paying $1,500 (expiry: March 28).
- Net income: $1,000.
Why it works:
If Bit stays above $85,000:
You keep the $1,000 option premium. This is a 100% return.
If Bit drops to $80,000:
You lose $5,000 ($85,000 - $80,000), but you keep the $1,000 option premium, so the maximum loss is $4,000.
Summary:
This is the "smart contrarian investor" strategy. You earn the option premium by betting that the panic is temporary. Just be prepared to buy Bit at $85,000 if forced to.
Summary: Options Strategies for the Post-Bit Selloff
After a significant Bit selloff, your trading decisions should align with your expectations for the future market direction. Here's a quick summary of the options strategies we discussed, including their risk/reward profiles and suitable scenarios:
In conclusion,
After the sell-off, the mood is high, but savvy traders can turn uncertainty into opportunity. The key is to assess your risk tolerance, market outlook, and time frame, and then choose the appropriate options strategy. Here are some ways to think about it:
- If you are concerned about another downturn, buy protective Bit puts.
- If you believe Bit will consolidate, sell covered Bit calls.
- If you expect a rebound, choose a Bit bull call spread.
- If you expect high volatility, choose a long-dated straddle.
- If you believe the market has overreacted, choose a Bit bear put spread.
No strategy is foolproof, so always manage your risk and position size. If unsure, start small, hedge, and let the market validate your judgment.
