This is how Bitcoin options traders can prepare for approval of a BTC ETF

Very few events can permanently shake up the cryptocurrency market that actually drive the price of Bitcoin and Altcoins up sharply. One example is when Xi Jinping, the president of China, called for blockchain technology to develop across the country in October 2019.

The unexpected news sparked a 42% rise in the price of Bitcoin (BTC), but the move completely faded when investors realized that China did not change its negative stance on cryptocurrencies. As a result, only a handful of tokens focused on China’s FinTech industry, blockchain-based tracking, and industrial automation saw prices consolidate at higher levels.

Some “crypto news” and regulatory developments have had a lasting impact on investor perception and their willingness to interact with the cryptocurrency market. Not all are positive. For example, the introduction of the Chicago Mercantile Exchange (CME) bitcoin futures in December 2017, which, according to experts, burst the “bubble” and led to an almost three-year bear market. Despite this result, it was positive that institutional investors finally had a regulated instrument at their disposal to bet against cryptocurrencies.

This is how Bitcoin options traders can prepare for approval of a BTC ETF
This is how Bitcoin options traders can prepare for approval of a BTC ETF

Tesla’s announcement in February of this year that it had invested 1.5 billion US dollars in Bitcoin has effectively changed the perception of cautious corporate and institutional investors and confirmed the thesis of “digital gold”. Although the price climbed to an all-time high near $ 65,000 and then fell to $ 29,000, it helped establish a level of price support.

Believe it or not, investors have been waiting for the US Securities and Exchange Commission to approve a listed instrument based on Bitcoin futures since July 2013, when the Winklevoss brothers presented their “Bitcoin Trust”.

Grayscale’s Bitcoin Trust (GBTC) was finally able to enter the OTC markets in March 2015, but various restrictions apply to these instruments that restrict investor access.

A potentially positive price trigger is emerging

With this in mind, the SEC’s approval of a US-traded ETF is likely to be one of the events that will change the price of Bitcoin forever. By expanding the field of potential buyers to include the underlying asset, the event could be the catalyst for BTC to become a multi-billion dollar market cap asset.

Bloomberg ETF analysts Eric Balchunas and James Seyffart released an investor notice on Aug. 24, suggesting that SEC approval could come as early as October. Although futures contracts could be used to leverage your long positions, if there is a sudden negative price move ahead of possible approval, there is a risk that they will be liquidated.

As a result, professional traders are likely to choose an option strategy such as long butterfly or long butterfly.

By speculating with multiple call options for the same expiration date, you can earn a profit that is 3.5 times greater than your potential losses. The purchased butterfly strategy enables the trader to profit from the rallies and limit the losses.

It is important to remember that all options have a specific expiration date and therefore the asset revaluation must be done during the specified time period.

Use purchase options to limit losses

The expected returns with Bitcoin options expiring on October 29th are listed below, but this method can be used with other time frames as well. Although costs vary, overall effectiveness is not compromised.

Estimated profit / loss. Source: Deribit Position Builder

This call option gives the buyer the right to purchase an asset, but the seller of the contract receives negative (potential) risk. The butterfly buy strategy requires a short position with a call option of $ 70,000.

To initiate execution, the investor buys 1.5 BTC in call options with an exercise price of $ 55,000 and at the same time sells 2.3 BTC in call options contracts of $ 70,000. To complete the operation, 0.87 BTC must be purchased in contracts of the call options of USD 90,000 to avoid losses above this level.

Derivatives exchange contracts in the form of Bitcoin, and $ 48,942 was the price when the example shown in this strategy was built.

The trade secures a limited loss with a possible gain of 0.25 BTC

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

Meanwhile, if the price is below $ 55,000 on October 29, the maximum loss is 0.07 BTC. Therefore, the “bought butterfly” appeal is a potential gain that is 3.5 times the maximum loss.

In general, trading offers a better risk / reward ratio than trading leveraged futures, especially when the limited loss is taken into account. It certainly seems like an attractive bet for those waiting for an ETF to be approved sometime in the next two months. The only initial commission required is 0.07 bitcoin, which is enough to cover the maximum loss.

The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Every investment and trading move involves risk, you will need to do your own research when making a decision.

Similar Posts