With soaring volatility, here’s how to generate income on Bitcoin

With soaring volatility, here’s how to generate income on Bitcoin

With the collapse of FTX – the world’s second largest cryptocurrency exchange – investors rushed to get their coins from unregulated sites. The subsequent price of cryptocurrencies plummeted, with Bitcoin losing 24% of its value in just two days.


As the crypto market calms and while implied volatility remains sky high, investors may consider selling options to generate income on the Proshares Bitcoin Strategy ETF (BITO).

With the rate on BITO trading at 10.15am at Thursday’s close, investors may consider selling the 7-strike put with expiry on 17 March. By selling this pad, investors will collect around $65 per lot. This is the maximum profit that will be received if BITO trades above 7 at expiration. The break-even on this trade is 6.35.

As a point of reference, Bitcoin would need to trade below $11,500 – losing over 30% of its current value by March – before trading starts to lose money.

Juicy Premiums On Bitcoin Options

Due to sky-high volatility and elevated skewness, this trade appears very attractive and could make money if bitcoin rises, remains neutral, or falls only moderately at expiration.

With an implied volatility of 96%, these options appear particularly expensive. That’s because BITO’s 30 day realized volatility (which includes the whole FTX debacle) is only 72%.

While investors are eager to watch for the next handed crypto fund or exchange to fall, it’s hard to see the market being surprised at this point, unless there’s an overwhelming contagion effect. With much of the leverage now out of the system, volatility should ease in the coming months – unless another major catalyst emerges.

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Interestingly, the break-even price of Bitcoin on this trade could be even lower than $11,500. This is because while Bitcoin futures should be trading at a slight premium to bitcoin’s spot price, they are currently trading at a discount.

The November and December contracts (held by BITO) trade at 1% and 2% respectively below BTC spot prices. Unlike Grayscale Bitcoin Trust (GBTC), which has a giant 40% discount that is unlikely to disappear anytime soon, futures must converge to bitcoin’s spot price at expiration. This reversal should provide a small tailwind to the price of BITO in the coming months.

Bitcoin futures trading on CME is regulated by the CFTC and does not face the solvency risk of trading cryptocurrencies on unregulated exchanges.


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