How to Make Money in a Sideways Market?

In this article, we discuss various option strategies designed to take advantage of the current range-bound market.

Crypto traders are used to big trends and volatile markets, but this year is different: prices have been stuck between a rock and a hard place. Bitcoin’s year-to-date range (low to high) falls short of 30%, compared with 120% in 2021 and a staggering 480% in 2020.

As a result, realized volatility and implied volatility both have been falling — maybe a sign of market maturing? While it was easy to ride a mega trend, it’s much harder to trade in a range-bound market.

Some prefer to step aside and wait for a breakout so as not to get caught by whipsaws. But markets could stay like this for extended periods. What can a trader do to keep profits flowing? Fortunately, there are several option strategies to resort to.

Short Strangle

One of them is a short strangle strategy which consists of simultaneously selling a call and a put option. Both options are sold out of the money. If the market trades sideways, neither option will be exercised, and the trader can just keep the premiums.

While this may sound appealing, it’s not without risk. The danger comes in when the market does break through. When that happens, the trader could potentially face large losses depending on how far the price runs. Due to the high risk of unlimited losses, this strategy is recommended only for advanced options traders, or at a minimum someone who is very disciplined to manage risks and cut losses quickly.

Double No-Touch (DNT)

Is there a strategy with limited losses for option laymen? Yes, Double No-Touch options, or DNT, commonly used in TradFi, allow traders to express a range-bound view with limited losses. A DNT option pays a fixed amount if the price remains within a pre-specified range until expiration. If the price breaches the range either above or below on any day, the trader loses what she paid for the option. Therefore, the maximum possible loss is the cost of buying the option.

Assume the current price of BTC is 40000 and a trader believes the price is likely to stay between 36000 and 44000 (i.e. +/- 10% of current spot) for the next 30 days. The trader buys a DNT option with these barrier levels for a premium of 20%. This means that for a $1 payout, the cost of the DNT option is 20 cents. It can also be read as the likelihood of the price staying within the range being 20%. Let’s say the trader wants a payout of $100, then she needs to invest $20 to buy such a DNT option.

If later the price touches 36000 or 44000, the trader loses her initial investment of $20. But if she’s right and the price never exceeds either barrier, she will receive $100, a 5-time gain vs her initial investment.

The table below shows the approximate costs of buying DNT options for various expirations and ranges (expressed in percentage relative to the current spot).

The narrower the range, or the longer the expiration, the cheaper the DNT because the barriers are more likely to be triggered, and vice versa. As always, there is a trade-off between risk and returns. Traders need to select the range and expiration wisely based on their views and risk appetite.

Looking back at this year’s price action, a +/- 20% range would have been a good choice. If someone had bought a 90-day +/- 20% DNT for 20% premium 90 days ago, the barriers would have survived and this DNT would have paid out 100% today, a 500% return on the bet.

About OrBit

OrBit Markets is an institutional liquidity provider of exotic options and structured products in digital assets. Founded by a strong team of leaders in trading and computer science, and backed by Matrixport and Brevan Howard Digital, OrBit brings its expert know-how in options to the crypto market. Headquartered in Singapore, OrBit serves institutions across CeFi, DeFi and TradFi looking for more sophisticated investing and hedging solutions in digital assets. For more information, visit www.orbitmarkets.io.

Important Disclaimer

This article is intended for educational purposes only and does not constitute the provision of investment advice and is not intended to do so. OrBit specifically disclaims all liability for any direct, indirect, consequential or other losses or damages that may arise from any reliance on this article.

Trading in cryptocurrencies, derivatives and structured products may involve a high degree of risk and may not be appropriate for all investors. Under some market conditions, it may be impossible to liquidate a position. Investors may suffer substantial losses and even lose the entire amount of your investment.

The product described in this article is intended for sophisticated investors capable of evaluating the merits and risks of the product, its suitability and appropriateness and its legal, taxation, accounting and financial implications.

Prices provided in this article are illustrative only and do not represent a firm bid or offer price.