Here’s how Bitcoin options traders may prepare for the approval of a BTC ETF.

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Bloomberg analysts predict that a BTC ETF will be approved in the next months, and astute options traders may use this method to profit from the potential.

Few events can jolt the cryptocurrency markets in a way that causes Bitcoin and altcoin values to surge 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, only a few tokens related to China’s FinTech business, blockchain tracking, and industry automation saw their prices stabilise at higher levels.

Some ‘crypto news’ and regulatory developments have a long-term impact on investors’ opinions of and desire to deal with the cryptocurrency market. Not all of these are positive. Consider the December 2017 launch of Chicago Mercantile Exchange (CME) Bitcoin futures, which experts claim busted the ‘bubble’ and precipitated a nearly 3-year-long bear market. Regardless of the decision, one advantage was that institutional investors now had a regulated tool for betting against cryptos.

Tesla’s statement in February 2021 that it had invested $1.5 billion in Bitcoin successfully shifted the image of hesitant corporate and institutional investors, validating the “digital gold” argument. Even if the price spiked to a $65,000 all-time-high and retracted all the way to $29,000, it helped to establish a support level price-wise.

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

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Grayscale’s Bitcoin Trust (GBTC) was ultimately permitted to list on OTC markets in March 2015, although these instruments are subject to severe limitations, 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 will almost certainly be one of those occurrences that will forever affect Bitcoin’s price. By broadening the pool of possible buyers for the underlying asset, the event could be the catalyst that propels BTC to multibillion-dollar status.

Bloomberg ETF analysts Eric Balchunas and James Seyffart wrote in an investor note on August 24 that SEC clearance might come as soon as October. Even if futures contracts could be used to leverage long positions, they would risk being liquidated if a rapid negative price move occurred before to approval.

As a result, professional traders will most likely use an options trading strategy such as the ‘Long Butterfly.’

Trading several call (buy) options for the same expiry date might result in gains that are 3.5 times the potential loss. A trader using the ‘long butterfly’ approach can profit from the upside while limiting losses.

It is critical to remember that all options have an expiry date, and as a result, the asset’s price must rise throughout the specified time period.

 

Using call options to limit the downside

Below are the expected returns using Bitcoin options for the October 29 expiry, but this methodology can also be applied using different time frames. While the costs will vary, the general efficiency will not be affected.

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Profit / Loss estimate. Source: Deribit Position Builder

This call option grants the buyer the opportunity to acquire an asset, but the contract seller suffers (possible) loss. The Long Butterfly approach necessitates taking a short position with the $70,000 call option.

To begin the execution, 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. To complete the deal, purchase 0.87 BTC contracts of the $90,000 call options in order to avoid losses above this level.

Derivatives exchanges price contracts in Bitcoin terms, and the price when this method was quoted 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, if the price falls below $55,000 on October 29, the maximum loss is 0.07 BTC. As a result, the ‘long butterfly’ appeal has a potential gain that is 3.5 times more than the maximum loss.

Overall, the strategy outperforms leveraged futures trading in terms of risk-to-reward, especially given the low downside. It certainly appears to be an appealing gamble for those anticipating ETF clearance in the coming months. The sole upfront price is 0.07 Bitcoin, which is sufficient to cover the maximum loss.

 

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