Upbeat music plays throughout.
Narrator: If you're an active trader who has considered trading cryptocurrencies like bitcoin, 2024 brought new tools: options trading on spot crypto exchange-traded funds.
Trading options on ETFs that hold an underlying cryptocurrency can let you speculate on price swings, regardless of whether you're bullish or bearish. Plus, using options allows traders to participate in the movement of cryptocurrencies without having to actually hold the cryptocurrency itself. That allows for even more flexibility in your trading, and it lets you use 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 caveats, though: 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.
If you're new to the world of derivatives, please check out some of our other options education or Schwab coaching webcasts to help.
Let's walk through three different strategies you could use for trading options on bitcoin ETFs. While we're going to focus on bitcoin, there are also ETFs that use ether, the virtual currency of the Ethereum blockchain, as the underlying asset.
To get started, let's say you're bullish on bitcoin. You could choose from several kinds of bullish options strategies. I'll focus on a long call vertical spread. This is a trade that consists of a long call at one strike price and a short call at a higher strike price. I'm using it because it profits most with a strong bullish move in the underlying, has a defined risk and gain, and the short call offsets some of the cost of the long call.
Let's look at a hypothetical example. Say the ETF XYZ is currently trading at $54. We'll buy an out-of-the-money call that's 70 days from expiration with a strike price of $55 and a premium of $5.30. Next, we'll sell a further out-of-the-money call that's also 70 days from expiration with a strike price of $60 for a credit of $3.40. With the standard options multiplier of 100 shares per contract, the total cost of this vertical spread would be $190 per paired contracts, or $530 minus $340. This is the maximum loss of this trade, not counting commissions and fees.
Let's get a quick reminder of what the long call vertical risk profile looks like. That long call is your main driver, and you'll want the underlying to stay above that line plus the cost of the trade. So, in order for this trade to be profitable, you'll need the underlying to stay above $56.90, or the long call strike price plus the cost to enter the trade.
The max gain for this trade would be $310 at expiration, which is the spread between the two strikes minus the cost to enter the trade.
Now let's instead say you're bearish, and you expect the price of bitcoin to dip. Like bullish strategies, you've got several choices when it comes to bearish trades; I'll focus on a long put vertical spread. This is a very similar trade to the one we just looked at, but in this one a trader buys one put and then sells another one with the same expiration at a lower strike price. I chose the long put spread for the same reason as the bullish trade—the max gain and max loss are defined and the short put offsets some of the cost of the long put, but this time the trade profits with a bearish move.
I'll use another hypothetical ETF, FAHN. Let's say FAHN is trading at $23. I buy an in-the-money put that's 70 days from expiration with a strike price of $24 at a $3.60 premium. Then, I sell a put on the same expiration with a strike price out-of-the-money at $20 for a $1.30 credit. With the options multiplier, this long put spread would cost a total of $230 per contract, or the $360 we paid for the long put minus the $130 we made on the short put. Like before, this is the maximum loss for this trade, not counting commissions and fees.
This risk profile is very similar to the long call spread. In fact, it's the mirror image. The break-even point with this trade, at expiration, is the long strike minus the premium we paid. The maximum profit on this hypothetical trade would be $170, which is the distance between the strike prices minus that initial $230 we spent to place the trade.
So those are two strategies for if you expect a move in a specific direction. What if you think bitcoin could make a large move, but you're not sure which way? Bitcoin is, after all, prone to sudden and dramatic price moves. In that case, some traders might consider a long strangle, which can profit with a move in either direction as long as the move is big or quick enough.
The strategy is built with two long out-of-the-money options: one call and one put with the same expiration. The thing is, when you buy these calls and puts a lot of what you are paying for is extrinsic value. So, that means you'd need bitcoin to either move more quickly or farther over time than the market expects, otherwise the value of this strategy will melt away.
Let's say another ETF is trading at $75. To open a long strangle, I can buy an out-of-the-money call with a strike of $83 for $5 and an out-of-the-money put with a strike of $67 for $4. Both expire in 90 days. These are both long positions, so I pay both premiums in order to open the strangle. That's a combined $900 with the options multiplier per contract. This amount is the maximum loss for this trade, not including commissions and fees.
For the call side of the trade, breakeven is the strike plus the combined premiums paid, and for the put it is the strike minus the combined premiums paid. Long strangles are subject to greater potential loss due to time decay than either vertical spread, so I'm working even harder against the clock. One possible strategy I can consider for this kind of trade would be to have a defined exit point, whether the trade goes my way or not.
If a move is big enough to cross either strike price, I could typically sell the in-the-money option or exercise it.
These are only a handful of the options possibilities with these cryptocurrency ETFs. Some other strategies might be more expensive to establish, like a long straddle, which could mean there's both greater risk but also greater potential reward. That is especially heightened when you're dealing with an asset that can have dramatic changes in price like bitcoin, so make sure you do your homework. Only you can determine your risk tolerance and decide what strategy makes the most sense for you.
On-screen text: [Schwab logo] Own your tomorrow®
