Here's how Bitcoin options traders could prepare for a BTC ETF approval

Very few events can rock the cryptocurrency markets in a lasting way, which really sends the prices of Bitcoin and altcoin in a sharp dir...


Very few events can rock the cryptocurrency markets in a lasting way, which really sends the prices of Bitcoin and altcoin in a sharp directional movement. This is the case, for example, when Xi Jinping, the Chinese president, called for the blockchain technology development across the country in October 2019.

The unexpected news caused a 42% pump in Bitcoin (BTC), but the movement faded completely when investors realized that China was not changing its negative position on cryptocurrencies. As a result, only a handful of tokens focused on China’s FinTech industry, blockchain tracing, and industry automation have seen their prices consolidate at higher levels.

Some “crypto news” and regulatory developments are having a lasting impact on the perceptions and willingness of investors to interact with the crypto market. Not all are positive. Take, for example, the launch of the Chicago Mercantile Exchange (CME) Bitcoin futures in December 2017, which, according to experts, burst the “bubble” and led to a bear market of almost 3 years. Despite this result, a bright spot was that institutional investors finally had a regulated instrument to bet against cryptos.

Tesla in February 2021 announces having invested $ 1.5 billion in Bitcoin effectively changed the perception of reluctant private and institutional investors, and it validated the “digital gold” thesis. Even though the price hit an all-time high of $ 65,000 and retracted to $ 29,000, this helped establish a level of price support.

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

Grayscale’s Bitcoin Trust (GBTC) was finally able to list it on the OTC markets by March 2015, corn many restrictions are applied to these instruments, limiting the access of investors.

A potentially positive price trigger is coming

With that in mind, the actual approval of an ETF listed in the United States by the SEC will likely be one of those events that will change the price of Bitcoin forever. By broadening the scope of potential buyers to the underlying asset, the event could be the trigger that will push BTC to become a multibillion dollar asset.

Bloomberg ETF analysts Eric Balchunas and James Seyffart issued a note to investors on August 24 suggesting SEC approval may come from October. Even if futures contracts could be used to take advantage of their long positions, they would risk being liquidated if a sudden negative price movement occurred prior to approval.

Therefore, professional traders will likely opt for an options trading strategy like the “Long Butterfly”.

By trading multiple call (buy) options for the same expiration date, one 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 fixed expiration date and therefore the appreciation in the price of the asset must occur during the defined period.

Use call options to limit the drop

Below are the expected returns using Bitcoin options for the October 29 expiration, but this methodology can also be applied using different timeframes. Although costs vary, overall efficiency will not be affected.

Estimate of profit / loss. 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 purchases 1.5 Bitcoin call options with a strike price of $ 55,000 while simultaneously selling 2.3 contracts on the call for $ 70,000. To complete the trade, one needs to buy 0.87 BTC contracts on the $ 90,000 call options to avoid losses above such a level.

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

Trade ensures limited decline with possible gain of 0.25 BTC

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

Meanwhile, the maximum loss is 0.07 BTC if the price drops below $ 55,000 on October 29. Thus, the call of the “long butterfly” is a potential gain 3.5 times greater than the maximum loss.

Overall, trading gives a better risk-reward ratio than trading leveraged futures, especially when you consider the limited drawbacks. It certainly looks like an attractive bet for those waiting for ETF approval in the next couple of months. The only upfront 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 move involves risk. You should do your own research before making a decision.