Strategies to Consider for Spot Bitcoin ETF Options

For traders who want to hedge positions and speculate on the movements of bitcoin, but without necessarily owning the cryptocurrency directly, there are more tools than ever.

For example, in 2024 a variety of issuers introduced spot bitcoin exchange-traded funds (ETFs). With the roll-out of the ETFs, traders gained new ability to demonstrate their opinion on bitcoin by using a well-known investment vehicle that trades like a stock.

But ETFs certainly are not the only way to trade on the value of bitcoin because options on those very ETFs provide another route for gaining exposure. Options can provide more flexibility and access to leverage to establish a position in an expensive asset with a smaller amount of cash up front. That can mean big gains, but it can also mean big losses. A couple other factors to consider: First, crypto ETFs have operating expenses, which wouldn't apply if you were trading crypto directly. Additionally, the price of the underlying isn't the only factor that affects options prices. For example, a bullish options position on a bitcoin ETF could still lose value with a bullish move of the underlying due to forces like time decay and changes in implied volatility. Though options are not ideal for every investor or situation, their availability could make sense in the right scenario. 

To illustrate the possibilities, we’ll walk through three option strategies that traders could use to speculate on spot bitcoin ETFs: the long call vertical spread, the long put vertical spread, and the long strangle. Note that this is not an exhaustive list of possible strategies, all examples exclude commissions and fees, and are for illustrative purposes only.

A trader who is feeling bullish about cryptocurrency has a number of strategies to consider, such as a long call vertical spread, which is a type of vertical spread that could profit if the price of the underlying rises. This trade consists of a long call with one strike price and a short call with a higher strike price. Both options have the same expiration date. While this strategy has an initial debit, the premium from the short call helps offset the long call's purchase price. Of course, the short call also limits the spread's profit potential.

Here's an example using options on a hypothetical bitcoin ETF, trading at $54:

• Buy an out-of-the-money call option with 70 days to expiration and a strike price of $55 costing $5.30. The total cost to the trader would be $530 after multiplying by 100, as standard options control 100 shares of the underlying.
• To create a long call vertical spread, the trader could add a short call that's further out of the money, also 70 days from expiration, and has a strike price of $60, which brings in premium income of $3.40 ($340 total).
• Therefore, the cost of this position is $5.30 – $3.40, or $1.90 (multiplied by 100, the cost would be $190). This is the theoretical max loss on the trade.
• The position in this example breaks even at $56.90, which is the $55 strike price of the long call, plus the $1.90 net cost of the position.
• The max gain, which would be achieved if the long call increases enough in value, would be capped at $310 at expiration, the difference between the strikes, minus the cost.

For those with a less-than-optimistic view on crypto prices, one strategy might be a long put vertical spread on a bitcoin ETF. To set it up, the trader buys one put in anticipation of a decline in the underlying, then writes another put with the same expiration, but with a lower strike price. The short put offsets some of the cost of the long put, but it also reduces the potential profit if the decline is large enough.

As an example, to speculate on a 10% decline in the price of bitcoin using a different hypothetical ETF trading at $23, a trader could:

• Buy an in-the-money put with 70 days to expiration and a strike price of $24 for $3.60, then write a put with the same expiration and an out-of-the-money strike price of $20 for $1.30.
• The cost of the position, with the multiplier, is $360 (debit) plus $130 (credit), or $230, which is also the maximum  theoretical loss.
• The break-even point with this trade, at expiration, is the long strike minus the premium we paid, so $24 minus $3.60, or $20.40.
• The maximum potential profit is $170 at expiration, which is the difference between the strikes minus the initial investment of $230.

Given that bitcoin is prone to sudden, dramatic price moves, some traders might opt for a long strangle, which can profit from either a move up or down in the underlying, provided the move is large enough. The strategy comprises two long options, one call and one put, with the same expiration and out-of-the-money strike prices on each. The goal is for the put to gain value from a large drop in the underlying, or the call to gain value from a large jump. The maximum gain on the call side is theoretically unlimited, and very large on the put side. For a call, breakeven at expiration is the strike plus the premium paid, and for the put it is the strike minus the premium paid. Keep in mind that long strangles are subject to greater potential loss due to time decay than either vertical spread we discussed, so a large, rapid move in the underlying is likely necessary to profit.

For example, suppose a trader believes government policy changes may increase the use case for bitcoin. If this happens, the trader thinks the price should go up further. However, if no positive changes are implemented after all, the price may drop. The trader is contemplating the possibility of a 10% change in either direction on one of the available spot bitcoin ETFs.

Assume a hypothetical underlying bitcoin ETF is trading at $75:

• To create a long strangle, the trader finds an out-of-the-money call with a strike of $83 trading at $5, and an out-of-the-money put with a $67 strike, trading at $4. Both expire in 90 days.
• Because both are long positions, the cost is ($5 + $4) x 100, or $900. This amount would be the theoretical maximum loss, which occurs if the price of the underlying is at or between the strike prices at expiration.
• If a sizable move occurs and either the call or put strike is crossed, the trader could either sell their in-the-money option, or exercise it, and then close the other option (or keep it open to expiration, with a known maximum loss).

A similar approach would be a long straddle, though it would have the same strike for the call and put and would be more expensive to establish.

What about an investor who owns a bitcoin ETF and instead wants to hedge? Given the potential for large moves in either direction when dealing with cryptocurrencies, many traders will want to protect the value of their crypto ETF position. One way to do this could be through a collar, which is made up of an underlying long position of 100 shares, a short call option, and a long put option. The options would have the same expiration, but the call strike would be above the current market price of the bitcoin ETF, and the put strike price would be below the ETF's price when the position is established.

If bitcoin's price and the ETF turn against the trader, the long put cushions the loss. The premium received from the short call will defray some or all the cost of the downside protection. However, the call strike sets an upper limit on gains, because if the price rises too much, the short call could be assigned.

As an example:

• Suppose a trader bought 100 shares of a hypothetical bitcoin ETF at $59. That would be a $5,900 outlay to acquire the ETF. To create a collar, assume the trader is allowing for a 10% change in the price of the ETF, up or down, with three months until expiration.
• The bid price of a call with 90 days to expiration and a strike price of $65 is $5.20. Because each option controls 100 shares, selling a call would mean premium income on the sale of $520. This is the ceiling price.
• The floor is set by the strike price of the long put, which in a regular collar would equal the number of short calls. The ask price of a put with a strike price of $53 is $4.80, for a total cost of $480.
• At the outset, the collar generated a credit of $40 before any trading costs.

If the ETF falls below $53, the long put can be exercised. However, the put position wouldn't break even until $48.20, which is the strike price minus the cost of the put. If instead the price of the ETF approaches the $65 ceiling, the risk of assignment increases. Buying back the option eliminates the risk, but it also requires a cost and a liquid market, so the initial credit is diminished or even erased. If the position remains open, and the short call is assigned, the gain on the underlying is capped at the strike price.

Bitcoin has been available as an investment for quite some time, and the financial markets have continued to offer new avenues for gaining exposure to cryptocurrency, even without owning it outright. In some instances, for traders with options approval, options on spot crypto ETFs may provide more opportunities to speculate or hedge positions.

However, it is important to remember that the examples provided are not the only strategies available for spot bitcoin ETF options. Investors have many potential approaches, and these will vary by situation and risk tolerance.

Below is a summary of the positions covered: