Sunday, May 30, 2021
Crypto Stocks Breakout Structures
By Century Financial in 'Investment Insights'
*Trading in financial markets carries risk and can result in loss of capital
*This performance is only observed with historical backtests and not traded by the company
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Risks & Assumptions
Brief
Rationale | Cryptos markets are known for their high risk - high return profile. Crypto investors who only saw massive gains in this space since past 1 year period were in for a huge dissapointment when all major crypto currencies crashed by more than 50% at one point of time few days back. This saw record amount of liquidations & stop triggers leading to even higher losses. The structures provide investors with 2 stocks that have moved in tandem with the overall price trends in crypto space. Taken together with the lower stock price (when compared to BTC & ETH) as well as availability of options on these stocks, the outright worst case loss will be limited to just the intial premium paid in case of futher drop in cryptos. MicroStrategy Inc ($ MSTR) holds around 91K Bitcoins on its portfolio balance sheet ($3.5 Billion as per currnet market prices). The stock has seen a massive jump this year when it spiked from its low of $280 to $1315 (600% Jump). Similarly, Silvergate Capital ($SI) jumped from its low of $60 to high of $187 this year. This came as cryptos broke above the $1 trillion market cap with massive gains seen in not just Bitcoin & Ethreum but also across other alt coins. |
Structure Design | The structures are designed to be breakout ones with expectations of huge volatilty. The upper breakeven points are kept at lower thresholds (20% average above last price) so that the gains are sufficient. |
Potential Loss Scenario (Capped in case of sharp drop in stock price) | The structures are designed to be breakout ones with expectations of huge volatilty. The upper breakeven points are kept at lower thresholds (20% average above last price) so that the gains are sufficient. |
Potential Profit Scenario (Incremental above breakeven point) | Above the breakeven price, the structure starts showing profits which are incremental in nature. |
Advantage of trading the structures over normal crypto | In case of trading with normal cryptos, chances of getting stopped out on either sides are huge owing to its volatile nature. In cases where no hard stops are properly defined, the potential losses can be huge. Over here, the worst case loss is capped at the downside. This implies that even in a worst case scenario where these stocks drop owing to sharp drop in crypto prices, the potential max loss is limited to the initial debit premium paid. |
Structure Design
The structures are based on Call Ratio Backspread strategy which involves shorting of 1 ITM Call simultaneously going long on 2 OTM Calls.
Statistics
Structure | Expiry | Last Price | Exposure Size | Lower Call Strike Sell ( 1 *) | Upper Strike Call Buy (2*) | Initial Entry Cost/Stock Unit | Structure Price Range Considered | Breakeven Price | Potential Max Pofit | Potential Max Loss | Potential Max Loss Range | Loss When stock Potential price drops below Lower Call Strike | Beta (Bloomberg Estimate) | Historical Volatility (Bloomberg Estimate) |
Microstrategy Breakout | 16th July,2021 | $485 | 1 Lot = 100 Shares | 93% | 103% | $24 ( 5 %) | $100 - $820 | Above $574 | $24,600 | $(7,400) | $460 - $540 | Max Loss capped at -$2,400 | 1.47 | 93% |
Silvergate Breakout | 16th July,2021 | $111 | 1 Lot = 100 Shares | 86% | 104% | $3 ( 2.7 %) | $30 - $200 | Above $138 | $6,200 | $(2,300) | $105 - $125 | Max Loss capped at -$300 | 1.64 | 95% |
Data Source: Bloomberg
Prices & Data as of: 26/05/2021 - US Market Open
$ MSTR Correlation Chart with $ BTC & $ ETH ( Duration : Last 1 Year | Source : Bloomberg )
$ SI Correlation Chart with $ BTC & $ ETH ( Duration : Last 1 Year | Source : Bloomberg )
Payoffs
Correlation & Comparison of $ MSTR, $ SI with $ BTC & $ ETH
Last 1 Year Correlation (05/28/2020 - 05/28/2021 | Source: Bloomberg) | ||
Bitcoin | Ethereum | |
Micro Strategy | 65% | 60% |
Silvergate Capital Corp | 58% | 25% |
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data & Prices as of: 26/05/2021 (US Market Open)
Arun Leslie John
Chief Market Analyst
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