The recent collapse of FTX early in November 2022 had an immensely disastrous effect on the Cryptocurrency market, as Cryptocurrencies across the globe plunged down.
Following the demise of FTX, the world’s second-largest cryptocurrency exchange, investors hurried to withdraw their funds from unregulated cryptocurrency exchanges. The prices of cryptocurrencies fell as dramatically.
Investors lost billions in days when the most prestigious cryptocurrency ‘Bitcoin’ sloughed by 24% in only two days.
But the current market indicators have shown overall signs of recovery as the crypto market remains calm over the past few days.
As implied volatility remains high in the crypto market, investors might try selling options to earn profits on the Proshares Bitcoin Strategy ETF (BITO).
With BITO trading around 10.15 as of Thursday’s close, investors might think of selling the 7-strike put with a March 17 expiration. Investors who sell this put will earn roughly around $65 per lot.
This accounts for maximum profit, which investors could receive if they trade BITO above 7 on expiry. The break-even number on this trade is $6.35.
Investors Can Enjoy Fruitful Gains on Bitcoin Options
Due to the immense volatility and skew, the BTO trade strategy looks highly appealing and has the potential to earn money if bitcoin surges, remains neutral, or plunges very minimally before expiry.
However, these options look costly, with an implied volatility of 96%. This is due to BITO’s 30-day realized volatility (which covers the entire FTX mess) being just 72%.
While investors are waiting for the exchange to collapse or the next overleveraged crypto fund, it is difficult to see the market being caught off guard at this stage, unless there is a massive contagion impact.
With much of the leverage removed from the system, volatility should fall in the next months — unless a large new event develops.
The Break-Even Point
Surprisingly, the Bitcoin break-even price on BTO trading could be lower than $11,500. This is because, while Bitcoin futures should trade at a tiny premium to the spot price of bitcoin.
However, they are now trading at a discount. The November and December contracts (which BITO owns) are offered at 1% and 2% less than the current BTC spot price.
In contrast to the Grayscale Bitcoin Trust (GBTC), which yields a gigantic 40% discount and is unlikely to diminish anytime soon.
The futures must congregate to bitcoin’s spot price at the end of the contract. This backwardation has to offer BITO a little flurry in the coming months.
The CFTC regulates Bitcoin futures trading on the CME and eliminates the solvency risk associated with unregulated exchanges being used to trade cryptocurrencies.