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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Sunday, May 30, 2021

Crypto Stocks Breakout Structures

by Century Financial in Investment Insights

Crypto Stocks Breakout Structures
Crypto Stocks Breakout Structures

*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


The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions
The structures are based on stocks that have showed high beta movement with respect to major crypto currencies – BTC & ETH. The below mentioned correlations are as per the historically observed ones and may change significantly in the future as per the underlying market dynamics.
The structures are based on the stock options and involve simultaneous buying as well as selling of the options.
Trading pairs is not a risk-free strategy. The difficulty comes when the two underlying prices begin to drift apart, i.e., the spread starts to trend instead of reverting to the original mean. Thus, it is essential to adhere to strict risk management rules when dealing with such adverse situations.
Trading in crypto markets and its associated derivative &correlated instruments carries significant risk and is extremely volatile.
Calculations of estimated profits and losses do not include applicable holding costs and transaction charges.

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.


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 )


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
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data & Prices as of: 26/05/2021 (US Market Open)

Arun Leslie John
Chief Market Analyst

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