Bitcoin Options - Part I
Time to add a new wealth engine: bitcoin options.
Bitcoin has been the subject of a dozen different articles here on Wealth Systems. Similarly, we’ve written a multi-part series on options. Please read that first if you don’t know the difference between a bull spread and a covered call.
Now that options trading has begun for bitcoin this opens up an entirely new wealth engine that we can design, engineer and optimize.
Given this is a brand new market that only began trading in November 2024 there is limited information. We don’t know anything about the market behavior including how the participants price volatility and other key factors. This means I am initially going to invest a small amount of capital into this engine. Once the market matures and has a longer history of relationships between implied volatility and underlying price… that’s when I’ll fully fund and run a BTC options trading account.
For now I am on a fact finding mission and eventually I’ll build out a small portfolio running 2 or 3 strategies.
I already own plenty of BTC (never enough though.. Bitcoiners will understand) but I am interested in using options strategies to increase my exposure to BTC price action in the coming months.
I am also always interested in using strategies to activate new income sources, or wealth engines to use the Wealth Systems term.
Which strategies? Let’s discuss.
Options Strategies
Options are used by traders in a variety of ways.
They are used to increase your exposure to an underlying asset, to decrease your risk profile and/or to generate income.
Traders can use options to speculate on the direction of the underlying asset. For example, if a trader believes that the price of a stock will go up, they can buy a call option. If the price of the stock does go up, the trader will be able to sell the option for a profit.
Traders can use options to hedge against losses in their portfolio. For example, if a trader owns a stock that they believe may go down in price, they can buy a put option. If the price of the stock does go down, the trader will be able to sell the option for a profit, which will offset some of their losses.
Traders can use options to generate income. For example, a trader who owns a stock can sell a covered call option. If the price of the stock stays below the strike price, the trader will keep the premium from selling the option.
Options are by no means easy or free money. They add the extra difficulty of needing to anticipate market direction and timing. By contrast, traditional equities investing can be a matter of “buy and hold”. You buy Microsoft or an ETF of a given sector and then wait around 10-years and you are likely to have a positive return.
There is no analog to this with options. As time marches forward toward the expiration of the contract the price of the different options chains changes constantly, often dramatically.
You can have the right idea but time runs against you so hard that you lose.
Oh, and in the case of buying options you start off right away by losing (paying the premium) and hope to capture that back over time via price action of the underlying and other factors. You need to get more things right with options, and more can go wrong.
This means options are extra difficult.
Why would people engage in options trading then?
Options are fascinating because you can deploy leverage using a lot of unique methods - synthetic longs, ratio spreads, and many others. This leverage can allow big players to offset a large amount of risk for a relatively small amount of capital or go longer with less capital exposed.
Risk management is the primary use case for options among professional traders.
That said, there are many income producing strategies utilizing options and given the leverage options provide they are one of the best ways to go long - again with minimal and known upfront capital requirements.
Let's break down a few of these option trading strategies to ensure we have a baseline, starting with the most basic and working up the complexity ladder.