Bloomberg analysts predict that a BTC ETF will be approved in the coming months, and savvy options traders may be able to profit from this potential.
Few events have the power to disrupt the cryptocurrency markets in a way that causes Bitcoin and altcoin values to swing sharply in one direction. In October 2019, China’s President, Xi Jinping, urged for the development of blockchain technology throughout the country.
The surprising news sparked a 42 percent increase in Bitcoin (BTC), but the movement quickly faded as investors understood China’s attitude on cryptocurrencies would not change. As a result, the values of only a few tokens focusing on China’s FinTech business, blockchain tracing, and industry automation have stabilized at higher levels.
Some ‘crypto news’ and regulatory developments have a long-term impact on investors’ opinions of the crypto market and their desire to deal with it. Not all of these are positive. Consider the debut of Bitcoin futures on the Chicago Mercantile Exchange (CME) in December 2017, which experts say busted the ‘bubble’ and ushered in a nearly three-year bear market. Regardless of the conclusion, the fact that institutional investors now have a legal tool for betting against cryptos is a plus.
Tesla’s statement in February 2021 that it had invested $1.5 billion in Bitcoin dramatically shifted the image of skeptic corporate and institutional investors, confirming the “digital gold” argument. Even if the price jumped to an all-time high of $65,000 before retracing all the way to $29,000, it helped to establish a price support level.
Since the Winklevoss brothers filed for their “Bitcoin Trust” in July 2013, investors have been expecting the US Securities and Exchange Commission to approve a Bitcoin futures exchange-traded product.
In March 2015, Grayscale’s Bitcoin Trust (GBTC) was able to list it on OTC markets, although these instruments are subject to a number of restrictions, limiting investor access.
A potentially positive price trigger is coming up
With that in mind, the SEC’s effective approval of a U.S.-listed ETF is likely to be one of those occurrences that will forever change Bitcoin’s price. The event could be the catalyst that propels BTC to multi-billion-dollar status by broadening the pool of possible buyers for the underlying asset.
On August 24, Bloomberg ETF analysts Eric Balchunas and James Seyffart published an investor note speculating that the SEC clearance might come as early as October. Even if one might leverage their long positions with futures contracts, they risk being liquidated if a surprise negative price move occurs before the approval.
As a result, professional traders will most likely use an options trading strategy such as the ‘Long Butterfly.’
One can achieve gains that are 3.5 times bigger than the potential loss by trading numerous call (buy) options for the same expiry date. A trader can profit from the upside while limiting losses using the ‘long butterfly’ technique.
It’s vital to understand that all options have an expiration date, and as a result, the asset’s price must increase within that time frame.
Using call options to limit the downside
The predicted returns utilizing Bitcoin options for the October 29 expiry are shown below, but this concept can be applied to other time frames as well. While expenses will fluctuate, overall efficiency will not be harmed.
The buyer has the opportunity to purchase an asset under this call option, but the contract seller faces (possible) negative exposure. A short position employing the $70,000 call option is required for the Long Butterfly method.
To begin, the investor purchases 1.5 Bitcoin call options with a strike price of $55,000 while concurrently selling 2.3 contracts of the $70,000 call option. To complete the deal, buy 0.87 BTC contracts of the $90,000 call options in order to avoid losses above this level.
Derivatives markets price contracts in Bitcoin, and the price at the time this technique was mentioned was $48,942.
The trade ensures limited downside with a possi 0.25 BTC gain
In this situation, any outcome between $57,600 (up 17.7%) and $90,000 (up 83.9%) yields a net profit. For example, a 30% price increase to $63,700 results in a 0.135 BTC gain.
Meanwhile, the maximum loss is 0.07 BTC if the price is below $55,000 on October 29. Thus, the ‘long butterfly’ appeal is a potential gain of 3.5 times larger than the maximum loss.
Overall, the trade yields a better risk-to-reward outcome than leveraged futures trading, especially when considering the limited downside. It certainly looks like an attractive bet for those expecting the ETF approval sometime over the next couple of months. The only upfront fee required is 0.07 Bitcoin, which is enough to cover the maximum loss.