A tumbling stock market can create profitable opportunities for bitcoin traders

A tumbling stock market can create profitable opportunities for bitcoin traders

Some of the world’s largest companies are expected to report second-quarter earnings in October, including electric car maker Tesla on October 18, tech giants Meta and Microsoft on October 24, Apple and Amazon on October 26 and Google on October 30. For now, the potential for a more severe global economic slowdown remains, and weak earnings could add to the uncertainty.

Given the unprecedented nature of the US Federal Reserve’s tightening and growing macroeconomic uncertainties, investors fear corporate profitability may begin to deteriorate. In addition, persistent inflation continues to force companies to cut back on hiring and adopt cost-cutting measures.

Strengthening the dollar is particularly punitive for companies listed in the United States because their products become more expensive in other countries, and lower revenue brought in from abroad negatively affects the bottom line. Google, for example, is expected to grow its revenue by less than 10%, down from 40% growth in 2021.

The companies that make up the S&P 500 account total $32.9 trillion and crypto investors expect some of these bets to enter Bitcoin (BTC) if earnings season fails to sustain modest growth — suggesting that the stock market should continue to underperform.

On the one hand, traders are facing pressure from bitcoin’s correlation with stocks, but on the other hand, bitcoin’s scarcity may shine as inflation concerns emerge. This will likely create a huge opportunity for those who are betting on the price of BTC going up, but you should also be very careful with those open positions.

Risk-averse traders can use futures contracts to capitalize on their long positions, but they also risk being liquidated if a sudden negative price move occurs before the corporate earnings calendar. Thus, professional traders are more likely to opt for options trading strategies such as the “long butterfly”.

By trading multiple call (buy) options for the same expiration date, traders can make gains 3 times higher than their potential loss. This options strategy allows the trader to profit from the upside while limiting losses.

It is important to remember that all options have a fixed expiration date, so the price hike of the asset must occur within the specified period.

Cautionary approach to using call options

Below are the expected returns using Bitcoin options for the October 28 expiration, but this methodology can also be applied using different time frames. While costs will vary, overall efficiency will not be affected.

Estimating profit/loss. Source: Deribit Position Builder

This call option gives the buyer the right to receive an asset, but the seller of the contract receives a (potential) negative exposure. The Long Butterfly strategy requires a short position with a call option, but the trade is hedged on both sides – which limits exposure.

To start the execution, the investor buys 13 Bitcoin call options with a strike of $20,000 and sells 24 contracts of $23,000. To finish the trade, one can buy 10.5 BTC call options contracts of $26,000 to avoid losses above this level.

Derivatives exchange rate contracts in BTC terms, the price was $19,222 when this strategy was quoted.

With this strategy, any result between $20,690 (up 7.6%) and $26,000 (up 35.3%) results in a net profit – for example, an optimal price increase of 20% to $23,000 results in a net profit. A net profit of 1.36 BTC, or $24,782 at current levels. Meanwhile, the maximum loss is 0.46 BTC or $8,382 if the price at the expiration date on Oct 28 is below $20,000.

The “Long Butterfly” strategy provides a potential profit 3 times greater than the maximum loss.

In general, trading yields a better risk-to-reward outcome than leveraged futures trading, especially given the limited downside. It certainly looks attractive to those anticipating deteriorating business conditions for listed companies.

It is worth noting that the only upfront fee required is 0.46 BTC, which is enough to cover the maximum loss.