Bitcoin ETF Options: What You Need to Know
Bitcoin ETF options offer a new way for investors to gain exposure to Bitcoin price movements without directly owning the cryptocurrency while combining the flexibility of options trading. Bitcoin ETF options can also provide potential opportunities for both speculation and risk management.
Whether you're looking to possibly profit from Bitcoin's volatility or hedge your cryptocurrency-related portfolio, understanding how Bitcoin ETF options work may be very useful to some option investors. In this guide, we’ll explore what Bitcoin ETF options are, their potential benefits and risks, and key considerations for those interested in trading them.
What are Bitcoin ETF options
Bitcoin ETF options are financial derivatives that give holders the right, but not the obligation, to buy or sell shares of a Bitcoin Exchange-Traded Fund (ETF) at a specified price (strike price) on or before a particular expiration date. These options work similarly to other types of options but are tied to Bitcoin ETF shares rather than the underlying cryptocurrency itself.
How Bitcoin ETF options work
Bitcoin ETF options work similarly to traditional options, but instead of being based on individual stocks or other assets, they are based on shares of a Bitcoin Exchange-Traded Fund (ETF). These options give investors the ability to speculate on the price movement of Bitcoin through a regulated, tradable product, without having to own the actual cryptocurrency.
Call options
Bitcoin ETF call options are financial contracts that give the buyer the right (but not the obligation) to buy shares of a Bitcoin ETF at a specified price (known as the strike price) before a specified expiration date.
Keep in mind, these call options also come with the risk of losing the premium paid if the market does not move in the expected direction.
Put options
Bitcoin ETF put options are financial contracts that give the buyer the right (but not the obligation) to sell shares of a Bitcoin ETF at a specified price (the strike price) before a specified expiration date.
Note that these put options come with the risk of expiration loss if the price does not fall below the strike price before expiration.
Liquidity and impact on Bitcoin volatility
The liquidity of Bitcoin options ETFs is crucial for trading efficiency and fair pricing; lower liquidity can lead to wider bid-ask spreads and challenges in entering/exiting positions.
With Bitcoin volatility, Bitcoin ETF options can amplify Bitcoin’s price swings due to increased speculation and hedging strategies. While they offer potential for managing risk, they also introduce the possibility of exacerbating volatility, especially during periods of market uncertainty or major events.
Considerations for trading Bitcoin ETF options
As the largest cryptocurrency by market capitalization, Bitcoin’s price swings can offer traders an opportunity to potentially earn — or lose — money quickly. If you are an experienced option trader exploring trading Bitcoin ETF options, here's some considerations.
Likely to be costly
Options price in the expected volatility of the underlying asset, the stock or fund represented by the option. More volatile assets have options that are priced at elevated levels, incorporating what’s known as implied volatility. That’s because sellers want to be compensated for an asset that could rise or fall substantially by the option’s expiration. While stocks are known for their relative volatility as an asset class, Bitcoin has undergone price volatility over its history.
That level of volatility means that Bitcoin ETF options are likely to be expensive.
May have a preference for selling
When implied volatility is high, experienced traders often prefer to sell options, as they are priced higher than when volatility is low. Although the potential profit from selling an option is limited, time works in favor of the seller. As the option nears its expiration date, its value may decrease each day, potentially allowing the seller to benefit from this time decay.
Potentially profit from declines
Options allow you to potentially profit from a decline in Bitcoin’s price. Traders can buy put options, which give the right to sell the ETF at a specific price, generally becoming more valuable as the ETF’s price drops. Multi-leg strategies can also be used when Bitcoin's price declines, helping offset costs or manage risk.
Potential income source
Think covered calls.
Bitcoin and Bitcoin ETFs don’t pay dividends, but options allow you the possibility of earning income while holding them. One common option strategy is the covered call, which can potentially provide income through the premiums received for selling corresponding call options.
With a covered call, you sell a call option for every 100 shares of the underlying security, receiving an upfront payment. If the fund’s price exceeds the strike price at expiration, you’ll be required to sell at that price. If it doesn’t, you can continue repeating the strategy and potentially earn more income from the option sales.
Covered calls are relatively low-risk, but they still carry some risks, including they do not protect against decrease in value of the underlying security, so it’s important to understand how the strategy works before using it.
Potential benefits and risks of Bitcoin ETF options trading
Potential benefits
Options allow some investors to control larger positions with a smaller investment, amplifying potential returns.
Bitcoin ETF options can provide exposure to Bitcoin's price movements without holding cryptocurrency directly.
Options can hedge other investments, managing risk if Bitcoin's price fluctuates unexpectedly.
Bitcoin ETF options offer diversification for portfolios focused on stocks or commodities, without holding Bitcoin.
A variety of strategies, like spreads and straddles, give flexibility to tailor exposure to Bitcoin's price movements.
Traded in regulated markets, Bitcoin ETF options offer security and legitimacy compared to direct cryptocurrency trading.
Potential risks
Trading options requires a solid understanding of Bitcoin and options strategies. Misjudging market conditions can lead to significant losses.
Leverage increases the risk of a total loss, especially with options that can expire worthless. If the Bitcoin ETF option doesn’t reach the strike price, your leveraged position could be wiped out. This risk is heightened by Bitcoin’s volatility, as small price changes can significantly impact whether an option expires in or out of the money.
Options have a limited lifespan, and their value decreases as expiration nears. If Bitcoin’s price doesn’t move as expected within the timeframe, you could lose the premium paid.
Bitcoin’s high volatility can lead to large price swings, offering potential profits but also significant risks if the price moves unexpectedly.
Limited liquidity in Bitcoin ETF options can lead to wider bid-ask spreads, making it harder to trade at favorable prices, especially in volatile markets.
Bitcoin’s price can be influenced by external factors like regulatory news or economic conditions, causing price swings that can negatively affect Bitcoin ETF options.
The buyer of an option risks losing 100% of the premium if the market doesn’t move as expected before expiration.
Selling Bitcoin ETF options, especially naked options, exposes you to the risk of being assigned and potentially incurring unlimited losses.
Bitcoin’s price can fluctuate wildly due to speculation, news, or regulations, leaving Bitcoin ETF option traders exposed to its inherent volatility.
FAQs about Bitcoin ETF options
Do any Bitcoin ETFs have options?
Yes, some Bitcoin ETFs do have options available for trading. However, the availability of options depends on the specific Bitcoin ETF and the exchange on which it is listed.
Can I trade options on Bitcoin ETFs?
Yes, you can trade options on Bitcoin ETFs — but it depends on the specific Bitcoin ETF you are interested in. Most of the available Bitcoin ETFs are futures-based, meaning they hold Bitcoin futures contracts rather than directly holding Bitcoin.
Where can someone buy Bitcoin ETF options?
Investors can buy Bitcoin ETF options through brokerage platforms that support options trading on major U.S. exchanges. These platforms give you access to Bitcoin ETFs that have options listed.
