How to Play New Options Trading With Bitcoin ETFs

November 04, 2024 at 07:00 AM EST

Six bitcoin coins — Stock Editorial Photography

In late October 2024, the burgeoning Bitcoin ETF industry moved a step closer to the traditional financial landscape for investors when the SEC approved proposals from both NYSE American and Cboe to list and trade options on a number of Bitcoin ETFs. This could be seen as a signal that U.S. regulators are increasingly comfortable viewing Bitcoin and related investment vehicles as a mainstream tool for investors.

There are now around two dozen Bitcoin ETFs, including both those holding actual Bitcoin as spot funds and those focused on Bitcoin futures. The October announcement by the SEC opens up options trading on just a handful of these funds. It's important for investors interested in taking advantage of the new options approach to investing in Bitcoin ETFs to keep in mind that, as of the end of October 2024, funds approved for options trading include:

Benefits of Options Trading With Bitcoin ETFs

A benefit to Bitcoin ETFs, as compared with holding Bitcoin directly, is that these funds insulate investors to some degree from the dangers of maintaining a wallet and conducting trades on a cryptocurrency exchange. Bitcoin ETFs allow investors exposure to Bitcoin and a way to track the price of the biggest cryptocurrency in the world by market value while helping to mitigate risk.

Options trading with Bitcoin ETFs functions similarly to options trading for other securities, in that it gives investors the opportunity to buy or sell shares of those ETFs at specified prices at a time in the future. Like other options trading applications, Bitcoin ETF options allow investors a way to wager that the price of the fund—a reflection of the price of actual Bitcoin or Bitcoin futures—will either go up or down.

Bitcoin ETF options allow investors to hedge against risks. Particularly for investors with substantial Bitcoin ETF holdings, put options can be used to offer some protection against a sudden drop in price. Call options give investors a chance to speculate on price increases without necessarily needing to invest in Bitcoin ETFs in the same way upfront.

Do the Risks Outweigh the Benefits?

On the other hand, options trading for Bitcoin ETFs adds new layers of risk and uncertainty to a space that is already fraught with volatility. Bitcoin has had major swings in price; in the last year, the price of one Bitcoin fell as low as around $35,000 and reached a peak of about $73,000. Bitcoin ETFs should have similar volatility if they are tracking these price shifts accurately.

The introduction of options trading to the Bitcoin ETF space makes for a more robust and dynamic market, but it also increases the use of leverage and the overall risk to individual investors taking advantage of this new opportunity. The fact that options trading is now available may even contribute to additional volatility in the Bitcoin space and, in turn, the Bitcoin ETF ecosystem.

With only select ETFs now including options trading as a possibility, it may also be the case that the Bitcoin ETF space becomes split, with these funds seeing increased interest by investors seeking complex trading mechanisms and non-options funds becoming a haven for investors looking for a more traditional approach.

Caution Wins the Day

Traditional options trading is best recommended only for investors with a sophisticated understanding of the risks and potential benefits of this practice, and this is even more true for options trading Bitcoin ETFs, given that these funds are inherently volatile already. Still, given that the SEC has stepped in to regulate options trading for crypto ETFs, that may reassure investors about becoming involved in these products.

Investors ready to take on the risk could also reap significant rewards. Though Bitcoin is up about 12% in the last month, some analysts think it could go much higher if institutional investors have to buy up shares of Bitcoin ETFs to hedge call options in a so-called gamma squeeze.