Bitcoin price volatility is expected at the Fed’s September FOMC meeting – here’s how to prepare

Bitcoin (BTC) has repeatedly failed to close above the $62,000 level since August 3 and is currently down 11% over the past 30 days. More importantly, the cryptocurrency has separated from the S&P 500 index, which is up 1% over the same period and just 1% below its all-time high.

Investors expect that risk markets, including Bitcoin, will see significant gains if the Federal Reserve (Fed) lowers interest rates, and professional traders are using BTC options to make high profits while limiting risks.

A 0.50% interest rate cut could boost risk markets, including Bitcoin.

Traders are grappling with how to adapt their strategies to Bitcoin's rising price, fearing forced liquidations due to unexpected price increases. The market segment already has a 0.50% interest rate cut, which makes it difficult to predict how the markets will react on September 18, despite the potential spark.

The price action indicates that positive macroeconomic trends in risk markets have been overshadowed by growing concerns in the cryptocurrency sector. Some argue that Democratic candidate Kamala Harris' lack of commitment to supporting the industry has contributed to Bitcoin's underperformance.

Gemini Exchange co-founder Tyler Winklevoss argued that “Operation Choke Point 2.0 is in full swing” and that “the Harris Crypto ‘reboot' is a scam.” Winklevoss highlighted the Fed's latest actions against customers banking on crypto-friendly institutions, after the Federal Reserve Bank of Philadelphia said the bank had cracked down on anti-money laundering and risk management practices.

Additionally, a US federal court judge sided with the US Securities and Exchange Commission (SEC) after it tried to dismiss Kraken's lawsuit. A U.S. District Court in Northern California ruled on August 3 that Kraken could be held liable for providing “investment contracts and therefore securities” that represent a major setback for the industry. Although Bitcoin was not directly affected, investor sentiment was dampened.

However, with a 25% chance of a 0.50% interest rate cut on September 18, with the CME FedWatch tool, many believe risk-averse markets may rally. Instead of risking rich future positions, professional traders are turning to alternative strategies.

‘Risk reversal' Bitcoin options strategy provides downside protection

Among these sophisticated strategies is ‘risk reversal', which protects against losses due to unexpected price changes. Basically, the investor benefits by holding put options and selling them cash. This setup eliminates asset trading risk and provides limited downside risk.

The trade described above focuses on September 20, although similar patterns can be applied to different maturities. At the time of pricing, Bitcoin was trading at $58,923.

First, the trader needs to protect himself from the downside by buying 3.5 BTC options at $58,000. Then, the trader sells 3.4 BTC options at $60,000 to get net returns above this level. Finally, the trader should buy 3.8 BTC call options at $65,000 with positive price exposure.

Related: Bitcoin Price Continues to Fall Below $60K – Here's Why

This alternative structure results in neither a profit nor a loss between $60,000 and $65,000. The investor is betting that the price of Bitcoin will break above this range on September 20th at 8:00 am UTC, making unlimited profits and suffering a maximum loss of 0.12 BTC (worth $7k).

If Bitcoin rises to $67,100 (a 14% increase), this strategy will yield a profit of 0.12 BTC, which is the maximum loss. In addition, if BTC gains 20% to $70,700, the strategy will return 0.30 BTC (worth $21.2k), the profit is greater than the limited minimum amount. Although there is no initial cost for this option structure, the exchange requires a 0.12 BTC margin deposit to cover the exposure.

This article is not intended for general information purposes and should not be construed as legal or investment advice. The views, ideas and opinions expressed herein are solely those of the author and do not necessarily represent the views and opinions of Cointelegraph.