Crypto News Flash - Trading School - Part 2

DISCLAIMER: These are some strategies which my crypto broker has sent to me, all I am doing is sharing on this open platform. Read and try them at your own risk - please do your own research.

Hedging with Collars

With BTC and ETH at depressed levels, many are looking to protect further downside on their holdings but are also expecting a bounce as we head into the end of the year (2nd week of September was the lows for 2017 before the crazy bull run). A strategy that allows you to do this is a Collar Strategy.

This strategy involves buying a put option to protect downside and selling a call option to offset the cost of the downside protection. This strategy is especially appealing right now because call options are more expensive than puts which allows you to maximise your upside for a given downside protection in multiples.

Example with options:

With ETHUSD at 220, buying a put option with a 200 ETHUSD stike level (means you are protected below 200 ETHUSD) costs 55 USD per ETH. selling a call option with a 300 ETHUSD strike level (which means above 300 your upside is capped) will give you 50 USD per ETH. Putting on this structure will cost you 5 USD per ETH and will last till end of March 2019.

It would protect you if ETHUSD goes below 200 while and allow you to profit from ETHUSD upside to 300 level. The whole structure will cost you 5 USD per ETH, and the risk-reward ratio is 1:4; you limit yourself to a 20 USD downside for a 80 USD profit upside.

However, many projects need to cash out for working capital which makes using options unpractical. We can solve this easily by replicating the payoff profile of the Collar strategy by using a combination of stop-loss and limit orders around the chosen strikes. This synthetic Collar strategy method would entail zero cost and allow you to cash out for working capital.

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I hope this helps and all the best in your trading adventures.

Cheers!

@watch-chronolog