With the collapse of FTX — the world's second-largest cryptocurrency exchange — investors rushed to get their coins off unregulated sites. The ensuing 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 can consider selling options to generate income on the Proshares Bitcoin Strategy ETF.
With the price of BITO trading at 10.15 at Thursday's close, investors can consider selling the 7-strike put with a March 17 expiry. By selling this put investors will collect around $65 per lot. This is the maximum profit, which would be received if BITO trades above 7 on expiry. The break-even on this trade is at 6.35.
As a reference point, Bitcoin would need to trade under $11,500 — losing over 30% of its current value by March — before the trade starts to lose money.
Juicy Premiums On Bitcoin Options
Due to sky-high volatility and elevated skew, this trade appears very attractive and can make money if bitcoin rises, remains neutral or falls only moderately by expiration.
With an implied volatility of 96%, these options appear especially expensive. That's because BITO's 30 day realized volatility (which includes the whole FTX debacle) is only 72%.
While investors are keen to watch for the next overleveraged crypto fund or exchange to drop, it is hard to see the market getting caught by surprise at this point, unless there is some overwhelming contagion effect. With a lot of the leverage now out of the system, volatility should decline in the coming months — unless a major new catalyst occurs.
Interestingly, the break-even price of Bitcoin on this trade might be even lower than $11,500. This is because while Bitcoin futures should trade at a slight premium to bitcoin's spot price, they are currently trading at a discount.
The November and December contracts (which BITO holds) are trading at 1% and 2% below BTC spot prices, respectively. Unlike the Grayscale Bitcoin Trust, which has a giant 40% discount that is unlikely to disappear any time soon, the futures have to converge to bitcoin's spot price on expiration. This backwardation should provide a slight tail wind to the price of BITO in the coming months.
Bitcoin futures trading on the CME are regulated by the CFTC and don't face the solvency risk of trading cryptocurrencies on unregulated exchanges.
