Option Calls on Bitcoin ETFs Are Both Innovative And Risky

What happens when you take volatility, add more volatility, and top it off with a splash of volatility? Options on bitcoin ETFs.

Option contracts, as the term implies, gives the holder the right to buy or sell the underlying asset at a specified price and timeframe — in this case ETFs that hold bitcoin. The iShares Bitcoin Trust ETF (IBIT) is the largest such exchange-traded fund at $47.6 billion in assets, and put and call options started trading on the Nasdaq exchange last month. Researchers from Bloomberg Intelligence found that IBIT saw a monumental amount of trading on Day One, nearly topping $1.9 billion in notional exposure.

While the strategies can be seen as the next logical step in the ascension of the leading alternative coin, critics are calling it a step into speculative investing waters. What we do know is that it’s another log on the fire of what has been a triumphant year for crypto investors — well, except for the ones that ended up with prison terms. 

Tales from the Crypto

Options on spot bitcoin ETFs gives investors the ability to hedge a change in price in either direction and come just 10 months after the funds debuted in January. Rampant growth of the options market — combined with a spike in the level of investors interested in crypto — has helped the products get regulatory approval. But keep in mind, investors don’t actually have to own the leading cryptocurrency or even an ETF that tracks it. It’s a basic use case of options, which have been applied to underlying stocks indexes for decades. 

In addition to options, popular cash flow-generating strategies, like covered call writing and put sales, can now be applied to IBIT, as well. The Bloomberg research also found that:

• IBIT traded 354,000 contracts on its very first day of trading Nov. 19.
• Of those contracts, 289,000 were calls while just 65,000 were puts. 
• The ratio of 4.4 to 1 suggested that investors were bullish on the future price of Bitcoin.

With Bitcoin topping the psychologically notable $100,000 mark, the options appear to be a simple case of giving the people what they want — and hoping they can handle it. Sure, they can be a great tool for investors who know how to control their emotions, but they are also a sign that modern markets just don’t work like they used to.

Handle With Care. Today’s markets are as buyer-beware as ever, but the massive amount of opinion about crypto investing and trading can be overwhelming to less-tenured clients. 

That makes this latest expansion into bitcoin an ideal opportunity for advisors to help clients handle this part of their portfolio with care. Especially when use cases for the underlying asset are not as clear-cut as with stocks, bonds or commodities. And with more crypto options available to clients, it’s better to start those conversations early.