Original | Odaily Planet Daily

Author | jk

In the recent eventful cryptocurrency market, novice investors often face a dilemma: How to seize the volatility caused by major events? How to position in an uncertain market while capturing profit opportunities and effectively controlling risks? To address this situation, we will introduce four options strategies suitable for beginners—Long Straddle, Long Strangle, Covered Call, and Synthetic Futures. Each of these strategies has its unique application scenarios and achieves profit objectives through different combinations.

Before reading this article, readers need to understand the basic concepts of options. If you are unclear about the concept of options, you can check here: What is an Option?

1. Long Straddle

The Long Straddle strategy involves simultaneously buying a call option and a put option with the same strike price for the same asset. In the face of expected significant market volatility, this strategy can potentially profit regardless of whether the market price moves significantly 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 or fall is uncertain, but the market price is sure to experience significant volatility.

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 a premium of $603, while also buying a put option with a strike price of $75,500 for a premium of $678. The total premium paid for the options is $603 + $678 = $1,281. Both options expire the next day.

Next, let's examine the potential profits in 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 initial premium paid 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 at expiration, both the call and put options will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire premium paid, which is a cost of $1,281.

The above examples are all based on the profits from exercising the options 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 movement, one side of the option premium will be lost, while the other side will bring considerable profits. 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 only the cost of purchasing the two options, meaning that even if the market does not fluctuate much, it will not incur greater losses. Additionally, this strategy can profit regardless of market direction as long as the volatility is significant enough. However, if the market price does not fluctuate enough to cover the option premiums, investors may face substantial losses; therefore, this strategy is more suitable for markets with high volatility or specific dates where high volatility is expected.

2. Long Strangle

The Long Strangle strategy involves buying call and put options with different strike prices to reduce costs. Generally, investors buy a put option with a strike price below the current price and a call option with a strike price 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 the 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 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 a premium of $165 according to real-time data from OKX, while also buying a call option with a strike price of $76,000 for a premium of $414. The total premium paid for the options is $165 + $414 = $579. Both options expire the next day.

Next, we calculate the profits 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 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 $579 premium, 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 and call options will have no intrinsic value, meaning neither option will be exercised. The investor will lose the entire premium paid, 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, resulting in lower premiums compared to the Long Straddle strategy, making it suitable for those with limited capital. However, it requires significant price movement to be profitable. If the price does not reach either strike price, the investor may face a loss of the option premiums. The greater the difference in strike prices, the larger the price movement required for profitability.

3. Covered Call

The Covered Call strategy involves selling a call option while holding the underlying asset, aiming to earn additional income when the market is relatively 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 markets that are moderately rising or consolidating, particularly for long-term investors who wish to earn 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 a premium of $263 according to OKX's option data. Thus, the investor earns an additional income of $263 by selling the call option. Both options expire the next day.

Next, we calculate the profits in three scenarios:

• Bitcoin price remains unchanged ($75,500):

• If the Bitcoin price remains at $75,500 at expiration, below the strike price of $76,500, the call option will not be exercised, and the investor can continue to hold the Bitcoin and earn the $263 option premium. Therefore, the total profit is $263.

• Bitcoin price drops to $75,000:

• If the Bitcoin price drops to $75,000 at expiration, still below the strike price of $76,500, the call option will not be exercised, and the investor still holds the Bitcoin and earns the $263 option premium. 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 the Bitcoin at the strike price of $76,500. The investor ultimately receives $76,500 from the sale and $263 from the option premium, totaling $76,500 + $263 = $76,763. If the investor were to buy Bitcoin back at this point, they would incur a loss of several hundred dollars.

The advantage of this strategy is that the investor can earn additional income (i.e., the option premium) by selling the call option while still retaining the underlying position and benefiting from potential price increases as long as 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 gains. Overall, this strategy is suitable for investors looking for stable income.

4. Synthetic Futures

The Synthetic Futures strategy involves buying a call option and simultaneously selling a put option, creating a position similar to holding the underlying asset. The Synthetic Futures strategy can achieve potential profits 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 for a premium of $718, while also selling a put option with a strike price of $75,500, earning a premium of $492. Thus, the investor's net expenditure is $718 - $492 = $226. Both options expire the next day.

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 $226 premium expenditure, 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 total net loss of $1,500 + $226 = $1,726.

• If the 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 net expenditure of $226 in option premiums.

It can be seen that this strategy is suitable for highly volatile markets and for investors who wish to achieve a similar position without holding the underlying asset, but there needs to be a strong conviction regarding the price direction. If the price drops, the risk is unlimited; however, if it rises, the potential gains can also be substantial.

Summary

These four strategies each have their advantages and disadvantages, and their applicable scenarios vary. The Long Straddle and Long Strangle strategies are both suitable for situations where significant volatility is expected but the direction is unclear, and both have limited losses confined to the option premiums, meaning they will not incur unlimited losses. For instance, during the recent elections and the monthly interest rate announcement dates, trading short-term options could provide opportunities to profit from volatility. However, if the market price only fluctuates slightly, both strategies will result in losses of the option premiums.

In comparison, the Long Straddle strategy has a higher cost but requires lower volatility; while the Long Strangle strategy has a lower cost but requires a larger price movement to be profitable.

The Covered Call strategy is suitable for markets that are moderately rising or flat, allowing investors to earn additional income by selling options. However, if the price rises significantly, the investor will need to sell the underlying asset at the strike price, potentially missing out on higher gains. This strategy does not incur unlimited losses but does limit the investor's potential profits.

The Synthetic Futures strategy is suitable for highly volatile markets, especially for those looking to create a position similar to holding the underlying asset using options. This strategy can lead to unlimited losses, particularly when selling put options if the market price drops significantly, as the investor will 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.

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