If HODLing is getting too hard, hedge your risk for free using Bitcoin options
As I write this article, the price of the world’s largest cryptocurrency has surged beyond $60,000. But what will happen next? Will it break through $100,000 or tumble back to $40,000 — or even all the way to $20,000? The higher the price, the more urgent the question becomes — should you take the profit or wait? Bitcoin holders’ anxiety is understandable.
If you bought BTC at $20k, you’ve already earned $40k per Bitcoin. Some will say that it’s time to lock in the profit, because if the price drops, you risk losing all you’ve gained. But on the other hand, who said that Bitcoin won’t be worth $100k in a month or two? In that case you’ll miss out on $40,000 in profits by closing the position now. So what should you do?
Well, what if there was a way to both protect your assets from the exchange rate risks and continue making profits if the price grows further? And what if that method costs nothing? No way, you might say — and yet it’s possible thanks to Bitcoin options.
Let’s say that the price is $60,000 and that you purchased 1 BTC a while ago at $20k. Your objective is to protect yourself against an eventual price slump.
Step 1: Buy a put option with the execution price of $50,000 that expires on June 25, 2021.
This means that, even if on the date of expiry Bitcoin will be worth less than $50k (for instance, $30k), you’ll still be able to sell it for $50k. Sounds good, right? However, this opportunity doesn’t come for free. Right now this put option is worth 0.09 BTC, or 9%. At the current price, this equals $5,400, which you would lose if the price doesn’t go down by the expiry date. Therefore, you could also take the next step…
Step 2: Sell a call option with the execution price of $100,000 and with the same expiry date.
Selling a call option means that, if BTC/USD goes above $100k (say, to $120k), you will still be obliged to sell your Bitcoin for $100k. True, you’ll miss out on some of the gains, but on the other hand, you want to close the position at $100k anyway. But the best part is that you’ll earn a premium of 9%, or 0.09 BTC — and this premium is guaranteed even if the price doesn’t budge.
Your premium for selling the call option is equal to the price you’ve paid for the protective put option, making the whole scheme free.
- The put option you’ve bought protects your assets in case the price falls below $50,000;
- The call option you’ve sold obliges you to sell your Bitcoin at $100k if the price grows above this mark;
- The duration of the whole scheme is 3 months, and the cost is zero.
Now you can sleep tight and forget about your open positions for a while. If the price surges, you’ll sell the BTC at $100k and earn $40k in profits, just like you wanted. If the price drops significantly, you’ll sell your Bitcoin at $50k and still keep a profit of $30k. And if the price will remain somewhere in the middle, you won’t lose a cent and will be able to sell at the actual market price.
Options open up a world of possibilities for those who know how to use them. You can not only keep what you’ve earned but also open complex positions aimed at aggressive growth at very moderate risks — something we’ll talk about next time.