Wednesday, September 28

Here’s how Bitcoin options traders can prepare for a BTC ETF approval


Very few events can shake up the crypto markets in a sustainable way that actually sends Bitcoin and altcoin prices into a sharp directional move. An example is when Xi Jinping, President of China, called for the development of blockchain technology across the country in October 2019.

The unexpected news triggered a 42% surge in Bitcoin (BTC), but the move completely faded as investors realized that China was not altering its negative stance on cryptocurrencies. As a result, only a handful of tokens focused on China’s FinTech industry, blockchain tracking, and industry automation saw their prices consolidate at higher levels.

Some ‘crypto news’ and regulatory development have a lasting impact on the perceptions and willingness of investors to interact with the crypto market. Not all are positive. Take, for example, the Chicago Mercantile Exchange (CME) Bitcoin futures launch in December 2017, which according to experts burst the ‘bubble’ and led to a nearly 3-year bear market. Despite this result, the positive was that institutional investors finally had a regulated instrument to bet against cryptocurrencies.

Tesla’s February 2021 announcement that it had invested $ 1.5 billion in Bitcoin effectively changed the perception of reluctant corporate and institutional investors, and validated the “digital gold” thesis. Even if the price rose to an all-time high of $ 65,000 and retracted to $ 29,000, it helped establish a support level as far as price goes.

Believe it or not, investors were expecting the United States Securities and Exchange Commission to approve an exchange-traded Bitcoin futures instrument. since July 2013, when the Winklevoss brothers applied for their “Bitcoin Trust”.

Grayscale’s Bitcoin Trust (GBTC) was finally able to list it on the OTC markets in March 2015, but numerous restrictions apply to these instruments, limiting investor access.

A potentially positive price trigger is coming

With that in mind, the effective approval of a US-traded ETF from the SEC will likely be one of those events that will alter the price of Bitcoin forever. By expanding the field of potential buyers to the underlying asset, the event could be the trigger that propels BTC to become a multi-billion dollar asset.

Bloomberg ETF analysts Eric Balchunas and James Seyffart issued an investor note on Aug. 24 that suggested SEC approval could come as early as October. Even though one could use futures contracts to leverage their long positions, they would risk being liquidated if a sudden negative price movement occurs before approval.

Consequently, professional traders will likely go for an options trading strategy like the ‘Long Butterfly’.

By trading multiple call options for the same expiration date, you can earn 3.5 times the potential loss. The ‘long butterfly’ strategy allows a trader to profit from the upside while limiting losses.

It is important to remember that all options have a set expiration date and, as a result, the asset’s price appreciation must occur during the defined period.

Use purchase options to limit downsides

The expected returns using the Bitcoin options for the October 29 expiration are shown below, but this methodology can also be applied using different time frames. While costs will vary, overall efficiency will not be affected.

Profit and loss estimation. Source: Deribit Position Builder

This call option gives the buyer the right to acquire an asset, but the seller of the contract receives negative (potential) exposure. The Long Butterfly strategy requires a short position using the $ 70,000 call option.

To initiate execution, the investor buys 1.5 Bitcoin call options with a strike of $ 55,000 while simultaneously selling 2.3 contracts of the $ 70,000 call. To finalize the trade, 0.87 BTC contracts of the $ 90,000 call options must be purchased to avoid losses above that level.

The derivatives exchange price contracts in terms of Bitcoin, and $ 48,942 was the price when this strategy was quoted.

The trade secures a limited downside with a possible profit of 0.25 BTC

In this situation, any result between $ 57,600 (a 17.7% increase) and $ 90,000 (an 83.9% increase) produces a net profit. For example, a 30% price increase to $ 63,700 results in a profit of 0.135 BTC.

Meanwhile, the maximum loss is 0.07 BTC if the price is below $ 55,000 on October 29. Therefore, the appeal of the ‘long butterfly’ is a potential gain 3.5 times greater than the maximum loss.

Overall, the trade yields a better risk-reward outcome than trading leveraged futures, especially when limited downside is considered. It certainly seems like an attractive bet for those awaiting ETF approval sometime in the next few months. The only initial fee required is 0.07 Bitcoin, which is enough to cover the maximum loss.

The views and opinions expressed here are solely those of the Author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement involves risk. You should do your own research when making a decision.