Nowadays, market participants don’t just settle for buying Bitcoin exchange-traded funds (ETFs); they can also dabble in options tied to these Bitcoin-based funds. Emerging onto the scene in late 2024, Bitcoin ETF options offer traders access to an even wilder—yet potentially more rewarding—breed of Bitcoin-linked investment vehicles.
Below, we’ll unravel the ins and outs of purchasing and disposing of Bitcoin ETF options, highlighting crucial points to keep in mind along the way.
Getting Started with Bitcoin ETF Options Trading
Bitcoin ETFs gained formal approval, allowing investors to gain exposure to Bitcoin’s price movement without stepping onto a cryptocurrency exchange floor. Essentially, owning a spot Bitcoin ETF mirrors owning Bitcoin itself; if Bitcoin appreciates by 2%, the ETF’s price typically follows suit with a similar uptick.
When it comes to options tied to Bitcoin ETFs, traders generally juggle two main varieties:
- Call options: Bestow upon the holder the right to purchase the underlying asset at a predetermined price throughout the option’s lifespan.
- Put options: Appreciate in value when the Bitcoin fund slides, making them the go-to choice if you foresee Bitcoin tumbling.
Snapping up either calls or puts opens the door to amplified gains if Bitcoin’s price swings in your favor. Keep in mind—you’ll pay a premium upfront for the option contract, which grants you certain rights until the option hits expiration. Each contract typically covers 100 shares of the associated ETF.
On the flip side, swooping in as a seller of Bitcoin ETF options means you receive the premium from the buyer upfront. However, you accept a binding commitment: to buy or sell the ETF shares at the strike price during the contract’s duration. Should Bitcoin’s price veer against your position, you could be forced into a loss-making transaction.
Leveraging a knowledgeable brokerage platform can help keep transaction expenses down and provide analytical tools to sharpen your trading decisions.
Spotlight on Bitcoin ETFs with Options Trading
Options aren’t universally available for all Bitcoin ETFs—only select funds have cleared regulatory hurdles to offer this capability. Here’s a rundown of Bitcoin ETFs presently equipped with options markets:
- iShares Bitcoin Trust (IBIT)
- Bitwise Bitcoin ETF (BITB)
- ARK 21Shares Bitcoin ETF (ARKB)
- Fidelity Wise Origin Bitcoin Trust (FBTC)
- Wisdom Tree Bitcoin Fund (BTCW)
Conversely, some ETFs like Invesco Galaxy Bitcoin ETF (BTCO), Valkyrie Bitcoin Fund (BRRR), VanEck Bitcoin ETF (HODL), and Franklin Bitcoin ETF (EZBC) currently do not support options.
In 2024, Bitcoin’s price volatility averaged approximately 4% daily, making options on Bitcoin ETFs a playground for traders seeking aggressive moves in a short time frame.
Practical Example: Buying a Call Option on a Bitcoin ETF
Imagine you anticipate Bitcoin’s price to climb over the next month. Purchasing a call option could be your move—it gains value if Bitcoin ascends before expiration. Suppose you choose the iShares Bitcoin Trust, presently trading at $55. A call option expiring in one month with a strike price of $55 costs $3.55 per share.
This call option secures you the right to snag 100 shares at $55 each until the option’s expiry date. Your upfront outlay? $355 (calculated as $3.55 × 100 shares).
Your break-even point sits at $58.55. If the stock climbs that high, your position turns profitable. Should the ETF finish at $60 upon expiration, the call option’s intrinsic value would be $5 per share. After subtracting the $3.55 premium, you’re left with a neat $1.45 profit per share—or $145 total for the contract.
If the fund’s price edges above $55 but stays beneath $58.55—say, $56—the option still retains some worth ($1 per share), but you’d realize a net loss ($2.55 per share). If it closes lower than $55, even by a cent, the call option becomes worthless, and you lose the entire premium paid.
Should Bitcoin absolutely skyrocket, the payoff on call options can be staggering. For instance, a surge in the Bitcoin fund to $70 (roughly a 27% jump) could make that option punch up to $15 in value—a staggering 322% increase versus the underlying asset’s move.
Alternative Routes: Diverse Bitcoin Strategies via Options
Options give seasoned traders a toolbox brimming with tactics to capitalize on Bitcoin’s infamously wild price swings. One popular maneuver is the covered call strategy, which nets profits from the often pricey Bitcoin option premiums.
Here’s how it unfolds: you hold the underlying Bitcoin ETF and sell call options against it. You immediately pocket the options premium, and if the ETF stays below the strike price at expiration, you keep the premium outright. This cycle can be repeated, allowing for steady income generation.
The catch? If the Bitcoin fund soars beyond the strike price, you’re obligated to sell your shares at that agreed price, missing out on additional upside gains lurking beyond.
Before diving headfirst, it’s vital to grasp the nuances and risks intrinsic to this approach.
Dissecting the Risks and Rewards of Bitcoin ETF Options
Trading Bitcoin ETF options cranks the already high-risk, high-reward nature of Bitcoin up several notches, magnifying both potential returns and pitfalls.
Potential Benefits
- Amplified Gains: Options serve as leverage—small shifts in Bitcoin’s price can trigger outsized changes in option values.
- Lower Capital Commitment: Options require less upfront cash than outright ETF purchases, reducing the capital you put on the line.
- Versatile Playbook: Whether betting on Bitcoin’s rise via calls, decline through puts, or cashing premiums by selling options, multiple strategies exist to suit different market views and risk appetites.
Key Risks
- Complete Investment Loss: Buying options may result in losing your entire premium if the market doesn’t move your way.
- Unlimited Loss Potential: Selling options can expose you to losses exceeding the premium received if Bitcoin’s price swings drastically.
- Timing Challenges: Even a correct price forecast falls flat if mistimed, as expiring options become worthless regardless of later market moves.
- Exacerbated Volatility: Layering options atop Bitcoin’s intrinsic wild swings can create rapid, unpredictable value gyrations.
Summing up, Bitcoin ETF options present a promising avenue for traders eager to turbocharge their exposure to the world’s most notorious cryptocurrency, but the same qualities that imbue them with profit potential also demand a disciplined and informed approach. Those seeking a calm, long-term holding might find better solace elsewhere.
Investors should always perform thorough due diligence and consult with financial advisors before venturing into options trading, as past gains in any investment do not guarantee future success.