Bitcoin Futures Options
If you thought buying Bitcoin on November 9, 2021, was a good idea you would have paid $64,938 for each Bitcoin that you purchased. Then each of your Bitcoins would have been worth $38,016 on the afternoon of April 26, 2022. This approach would have been like the “smart money” that said to keep buying as the Covid Crash took the S&P 500 down 31%. Meanwhile at Top Gun Options we called the crash (and the recovery) and printed money by trading options. Is there a way to do this with Bitcoin? The CME offers Bitcoin futures and Bitcoin futures options trading.
Futures on Bitcoin
Futures contracts for Bitcoin were first listed on the Chicago Board Options Exchange at the end of 2017 but were discontinued shortly after that. The Chicago Mercantile Exchange listed Bitcoin futures at the same time and those still trade. These futures contracts, as well as Ether futures trade on their Globex electronic platform and settle for cash. Unlike with options contracts futures contracts require the buyer or holder of a contract to purchase the underlying when the contract expires. Bitcoin contracts settle for cash so one does not need to come up with Bitcoin to settle but the buyer and seller of the futures contract are both obliged to settle. A Bitcoin futures contract represents 5 Bitcoin.
Options on Bitcoin Futures
Since January of 2020 for Bitcoin and March of 2022 for Ether, options trading on futures contracts has been available. These are standard option contracts in which the buyer of a contract has the option to execute or not and the seller is obliged to pay if assigned. These are European style options so they cannot be assigned prior to expiration. But one can close a position by trading out of the position before trading terminates at 4 pm London time on the last Friday of the contract month. One option contract is for one futures contract which is 5 BTC for Bitcoin 50 ETH for Ether. CME offers contracts for six consecutive months.
As we noted, Bitcoin can easily fall to half its value over just a couple of months. And it can double or more in value just as quickly. An options trader can hedge positions in Bitcoin futures options just as when trading Amazon, the S&P 500, or any equity. This approach typically takes away the potential for hitting a home run but also removes the potential for losing all of your trading capital and getting a margin call that will wipe out your entire portfolio.
Predicting Bitcoin Price
As of April 2022, Bitcoin is down about 40% from its November 2022 high. And the November 2022 high was nearly double its price in March 2021. “Experts” are predicting anywhere from $80,000 to $100,000 and more for Bitcoin by the end of the year. When looking ahead we commonly look at what the DRINCs are up to. The Democrats (and Republicans) spent too much in stimulus payments and the Fed dumped too much money into the economy so we are at a 40-year high for inflation with a real risk for a recession as the Fed prepares to jack up interest rates. What will Bitcoin do? There is no good evidence that Bitcoin works as a hedge against inflation or a safe have asset like gold was during the 1970s. The long term argument is that Bitcoin has a limit to how many will ever be produced (minted). So far that has not deterred the dramatic falls that it experiences after each dramatic rise.
Although converting one’s assets into Bitcoin has proved to be good way to put everything that you own on a memory stick (holding your codes) as you walk out of places like Ukraine none of this gives us a hint as to whether the “experts” will be right. So, if you are going to trade options on Bitcoin futures, happy hunting, make sure you hedge, and God Bless.