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


Very few events can permanently shake the cryptocurrency markets that really send Bitcoin and Altcoin prices in a sharp directional movement. One example is when Xi Jinping, China’s president, called for blockchain technology to develop across the country in October 2019.

The unexpected news caused Bitcoin (BTC) to surge 42%, 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 tracing, and industrial automation prices consolidated at higher levels.

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Some “crypto news” and regulatory developments have a lasting impact on the perception and willingness of investors to interact with the crypto market. Not all of them are positive. Take, 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 finding, it was positive that institutional investors finally had a regulated tool to bet against cryptos.

Tesla’s February 2021 announcement that it had invested $ 1.5 billion in Bitcoin has effectively changed the perception of reluctant companies and institutional investors and confirmed the “digital gold” thesis. Even when the price climbed to an all-time high of $ 65,000 and fell as low as $ 29,000, it helped establish a level of support in terms of pricing.

Believe it or not, investors have been waiting since July 2013, when the Winklevoss brothers filed for their “Bitcoin Trust” to have the US Securities and Exchange Commission approve an exchange-traded Bitcoin futures instrument.

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

A potentially positive price trigger is imminent

With that in mind, the effective approval of a U.S.-listed ETF by the SEC 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 trigger that turns BTC into a billion dollar asset.

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

As a result, professional traders are likely to choose an options trading strategy such as the “long butterfly”.

Trading multiple call (buy) options for the same expiration date can generate profits that are 3.5 times the potential loss. The “long butterfly” strategy enables a trader to profit from the uptrend while limiting losses.

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

Use call options to limit the disadvantage

The following are the expected returns when using Bitcoin options for the October 29th expiration, but this method can be used in other time frames as well. While costs vary, overall efficiency is not affected.

Profit / Loss Estimate. Source: Deribit Position Builder

This call option gives the buyer the right to acquire an asset while the contract seller receives a (potential) negative exposure. The long butterfly strategy requires a short position with the call option of $ 70,000.

To initiate execution, the investor buys 1.5 Bitcoin call options with an exercise price of $ 55,000 and at the same time sells 2.3 contracts of the call of $ 70,000. To complete the trade, one should buy 0.87 BTC contracts of the $ 90,000 call options to avoid losses above such a level.

Derivatives exchange price contracts in Bitcoin terms, and $ 48,942 was the price when this strategy was listed.

The trade ensures limited downward movement with a possible gain of 0.25 BTC

In this situation, any result between $ 57,600 (up 17.7%) and $ 90,000 (up 83.9%) is a net profit. For example, a 30% price increase to $ 63,700 results in 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 appeal of the “Long Butterfly” is a potential gain that is 3.5 times greater than the maximum loss.

Overall, the trade delivers a better risk / return result than trading leveraged futures, especially when you consider the limited disadvantages. It certainly looks like an attractive bet for those expecting ETF approval at some point in the next few months. The only prepayment 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 Cointelegraph. Every investment and trading movement involves risks. You should do your own research when making a decision.