Original Author: BitMEX
Hello everyone, welcome to BitMEX Options Alpha. Today, we will explore a hybrid arbitrage strategy that combines a BitMEX call spread with a "no" position on Polymarket regarding the question, "Will Bitcoin break $110,000 before the end of February?" The goal of this strategy is to capture potential gains if Bitcoin rises while hedging the risk of Bitcoin failing to reach $110,000 by utilizing the Polymarket position. In this article, we will analyze the trade structure in detail, discuss several possible profit and loss scenarios, and highlight key risks and mitigations you need to consider. Let's get started.
Trade Overview
The trade discussed in this article includes:
Buying a Bitcoin call spread on BitMEX (a bullish position).
Simultaneously buying a "no" position on Polymarket regarding the question, "Will Bitcoin reach $110,000 before February 28?"
Market Setup
As the end of February approaches, Bitcoin has the potential to reach $110,000, but it may also not reach that level. Against this backdrop, an interesting arbitrage opportunity emerges: combining BitMEX options positions with Polymarket hedges.
Polymarket allows users to bet on the binary outcomes of events, such as whether Bitcoin will reach a specific price. This provides the possibility of using Polymarket to hedge Bitcoin positions while also profiting from favorable price movements. By combining the BitMEX call spread with a "no" position on Polymarket (i.e., betting that Bitcoin will not reach $110,000 before the end of February), traders can balance risk and reward, maximizing the opportunities presented by Bitcoin's volatility.
BitMEX Options Market (Expiration February 28)
Polymarket
Trade Structure
This strategy relies on two core components:
BitMEX call spread
Bitcoin "no" position on Polymarket
BitMEX Call Spread (Expiration February 28)
The BitMEX position is a classic call spread designed to capitalize on rising Bitcoin prices while limiting downside risk.
Buy 1 call option at $108,000 (expiration February 28)
Sell 1 call option at $110,000 (expiration February 28)
This structure provides limited risk and unlimited upside potential (maximum gain of $1,700) if Bitcoin's price exceeds the higher strike price.
Polymarket Hedge ("No" Position)
On Polymarket, there is a binary options market where users can speculate on the likelihood of certain events occurring. For this strategy, the question involved is:
- Will Bitcoin reach $110,000 before February 28?
At this point, the position will be a "no" contract, betting that Bitcoin will not reach $110,000 before the end of February.
Buy "no" contract at 82¢ (example)
Cost: $250, face value $1
If Bitcoin does not reach $110,000, expected profit of about $300
If Bitcoin reaches or exceeds $110,000, expected loss of $1,350
This hedge provides protection if Bitcoin reaches $110,000, helping to offset some losses from the BitMEX position.
Profit and Loss Analysis
Understanding the potential outcomes of this strategy is crucial for making informed decisions. Let's look at four different scenarios:
Scenario 1: Bitcoin closes below $108,000
BitMEX: -$297 (maximum loss)
Polymarket: +$300 (if Bitcoin does not reach $110,000)
Net Profit: +$3
In this case, Bitcoin fails to reach $110,000 at expiration, and the Polymarket position profits $300. However, the BitMEX call spread incurs the maximum loss of $297. The final result is a slight net profit of $3.
Scenario 2: Bitcoin closes between $108,000 and $110,000
BitMEX: Profit = (Bitcoin price - $108,000) - $297
For example, at $109,000, profit would be $703
Polymarket: +$300 (if Bitcoin does not reach $110,000)
Net Profit: $703 (BitMEX profit) + $300 (Polymarket) = $1,003
This is the ideal scenario; if Bitcoin closes near $110,000, the BitMEX position provides stable gains, while the Polymarket hedge adds $300, resulting in a total profit of $1,003.
Scenario 3: Bitcoin closes above $110,000
BitMEX: +$1,700 (maximum profit)
Polymarket: -$1,350 (if Bitcoin reaches $110,000)
Net Profit: $350
If Bitcoin exceeds $110,000, the BitMEX call spread maximizes at $1,700, but the Polymarket hedge results in a loss of $1,350. The final net profit is $350.
Scenario 4: Bitcoin briefly touches $110,000 but closes below $110,000
BitMEX: Loss if the price is below $110,000
For example, at $108,000, loss would be $297
Polymarket: -$1,350 (because Bitcoin briefly touched $110,000)
Net Loss: -$1,647
In this less favorable scenario, Bitcoin briefly touches $110,000 but closes below that level. In this case, both the BitMEX call spread and the Polymarket hedge incur losses, resulting in a final net loss of $1,647.
Risks and Considerations
While this strategy offers an attractive risk-reward structure, there are several risks to be aware of:
1. Time Risk:
There is a 21-hour settlement gap between BitMEX (February 28, 08:00 UTC) and Polymarket (February 28, 23:59 ET). This time window could lead to unexpected volatility in Bitcoin, potentially invalidating the hedge.
2. Market Liquidity and Price Volatility:
During periods of high volatility, options may have wider bid-ask spreads. Polymarket may have limited depth, and larger orders could push market prices. Be mindful of slippage and trading fees.
Conclusion
This Bitcoin arbitrage strategy provides traders with an opportunity to capture upside potential through Bitcoin volatility while also hedging against key price levels. By combining the BitMEX call spread with a "no" position on Polymarket, you can construct a suitable trading strategy under different market conditions, whether Bitcoin is rising or consolidating.
However, it is crucial to closely monitor key risks, including the 21-hour settlement gap and the possibility of Bitcoin touching and reversing at critical price points. By implementing appropriate risk management techniques and being cautious with timing and liquidity, traders can maximize potential profits while minimizing exposure to significant losses.
In summary, this strategy offers a balanced risk-reward structure for those looking to capitalize on Bitcoin price volatility, with clear risk controls and defined upside potential.
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