Trading options on Bitcoin ETFs: 5 key tactics for traders
Options on Bitcoin exchange-traded funds (ETFs) made their debut on Nov. 19, with the launch of options on the iShares Bitcoin Trust ETF (IBIT). And options on other Bitcoin ETFs are coming up, too. The debut follows approvals from the Securities and Exchange Commission (SEC) in September and October for the new options, offering a new way to bet on the volatile cryptocurrency.
Bitcoin is the largest cryptocurrency by market capitalization, and this new means of playing its price swings offers traders another way to make — and lose — a lot of money quickly.
Here are five key tactics for Bitcoin traders looking to succeed in this volatile market.
What are Bitcoin ETF options?
Spot Bitcoin ETFs began trading in early 2024, and a number of companies rushed to set up a fund based on the most popular crypto. This new breed of Bitcoin fund owns the crypto directly, meaning its price closely tracks that of the coin itself. The best Bitcoin ETFs charge a low expense ratio, which is the price you pay each year as a percentage of your investment for owning the fund.
But the advent of options throws a new wrinkle into trading Bitcoin. Options give traders the ability to buy and sell these Bitcoin ETFs at specific prices over the life of the options contract.
- Call options give the option owner the right, but not the obligation, to purchase the Bitcoin ETF at a specific price until the option expires.
- Put options give the option owner the right, but not the obligation, to sell the Bitcoin ETF at a specific price until the option expires.
Options are attractive to many because traders can make more money more quickly than by holding the notoriously volatile cryptocurrency. Traders can earn multiples on their money over just days if they pick the right options. On the flip side, investors could easily lose huge amounts if they trade the wrong options, so it’s vital to know what you’re doing before trading.
That potential for significant loss is one of the key risks of trading options, but Bitcoin’s price fluctuations take that risk to an entirely new level.
Trading strategies for Bitcoin options
As you’re thinking about trading options on Bitcoin, here are five key trading tips to be aware of.
1. Bitcoin ETF options are likely to be expensive
Options price in the expected volatility of the underlying asset, the stock or fund represented by the option. More volatile assets have options that are priced at elevated levels, incorporating what’s known as implied volatility. That’s because traders want to be compensated for an asset that could rise or fall substantially by the option’s expiration. While stocks are known for their volatility, Bitcoin has shown off-the-charts price volatility over its history.
That level of volatility means that Bitcoin ETF options are likely to be expensive.
2. Bitcoin ETF options may be a better sell than buy
When an option’s implied volatility is high, smart traders may prefer to sell options because they’re priced at relatively high levels, compared to when the option prices in low volatility. While the potential gain for the sale of an option is limited, time works in the favor of the seller. Every day, the value of an option declines as it approaches expiration.
3. Multi-leg options strategies may be more attractive
Traders who set up more advanced options strategies may be able to offset some of that extra cost of volatility, however. For example, an options strategy known as a “bull call spread” involves buying a lower-priced call option and selling a higher-priced call option. The option sale helps offset the cost of the purchased option and reduces the cost of the trade, while still offering the potential to multiply your money if you set up the right kind of trade.
4. Bitcoin options can let you bet on the downside, too
Options let you profit when an asset falls, and Bitcoin has experienced significant downturns. Options allow you to play this downside, as traders can purchase puts, which give the owner the right to force someone to purchase the ETF at a specific price. So if the Bitcoin ETF declines in price, the put option becomes more valuable.
Traders can also use a multi-leg strategy to wager on the price decline of Bitcoin, helping offset the cost of Bitcoin’s volatility.
5. Options let you turn Bitcoin into a cash generator
Bitcoin doesn’t pay a dividend, and neither do Bitcoin ETFs. However, options allow you to turn the crypto into a potentially lucrative cash generator while you own it. One of the most popular strategies here is known as the covered call, and it can create significant income.
With a covered call, you can sell a call option for each 100 shares of the underlying fund. You’ll receive an upfront payment for selling the call. If the fund goes over the option’s strike price at expiration, you’ll be forced to sell the fund at the strike price. But if it doesn’t, you can repeat the strategy again and again, potentially generating significant money from these options sales.
Covered calls are one of the less risky options strategies, but they’re not without risk, so know clearly how it works if you’re going this route.
Bottom line
The approval of options on Bitcoin ETFs gives traders a new way to bet on the price fluctuations of the world’s most popular cryptocurrency. However, traders should be aware of the significant risk of trading options, and particularly Bitcoin ETF options.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.
