Bitcoin strangle is actually possible!

Okay, so for strangles we are looking for volatility, and everyone knows that this describes the bitcoin market. Now, I know next to nothing about cryptocurrency in general or bitcoin in particular, but I figure that this really doesn’t matter. I always say how stock traders should ignore fundamentals and many of the stocks I’ve traded are total mysteries to me where I often don’t even know what they do or if they do it well or badly. I really don’t care. So I should be able to trade bitcoin, right? :slight_smile:

But the next problem is that I really want to play the volatility with options so that I can use strategies like strangles to limit my risk. But alas there are no bitcoin options. If I have a crypto account, I can buy and sell bitcoin all day long, but they do not have options so that I can use strangles and profit from big moves up or down when I have no idea which way it’s going or why it goes that way.

Ah, but then I discovered that you actually can trade bitcoin options. They now have an ETF that is largely based on bitcoin and they have options on this ETF. The symbol for the ETF is BITO and it is available in any brokerage account.

So I started a test a couple weeks ago and entered a strangle. I did it small, just one contract and not very expensive at all, but I just wanted to see how it would work. It was very interesting.

BITO trades at a fraction of the actual bitcoin amount. For instance, right now bitcoin is 25,419.02, but BITO is 13.07. On the afternoon of 8/17 when I started, BITO had just had a big decline and was trading sideways at around 14.40. I decided that it could keep going down (no idea why it went down to begin with) but I wasn’t sure so instead of just buying a put, I entered a strangle.

9/15 Call 15 for 0.40 and Put 14 for 0.43. Just one contract each or $83.

The very next day, bitcoin gapped down pretty big so I closed the put for 1.02 ($102) ensuring a profit on the strangle. I decided to just keep the call because you never know when it could suddenly go up and at this point I’m trading on the house.

On 8/29 bitcoin went up big on news that the courts had decided favorably on an ETF. Must be something other than BITO. I believe that BITO is not an “official” ETF that is directly tied to the actual bitcoin. More of a proxy, but it still mostly works. More on this below.

But it did not go up quite as high as I originally bought my strangle, so my calls were still losers. Yes, I could still have sold them at a slight loss and added nicely to my profits, but instead I decided to enter a half-priced strangle. I re-bought the exact same put, this time for 0.48 because it was slightly lower than my original strangle entry and I waited to see which way it would go.

Well, it immediately went down and kept going down every day until today. I went ahead and closed my put for 0.98 and my call for 0.05 (1.03 total). So I bought into my two strangles for 0.40 + 0.43 + 0.48 = 1.31, and I exited for 1.02 + 0.98 + 0.05 = 2.05. My profit is 0.74 / 1.31 = 56.5%. The two down moves where I made all my profits were 7% and 9%. You have to think about this as an average 8% move. You cannot add these two because it was really two separate put trades that were purchased separately so it is not the same as a 16% move which would have more than doubled my money.

Now about BITO. One thing I will say about it is that the volume on BITO is much less than the volume on bitcoin. And the volume on the options are even less. This can cause problems because the bid-ask spreads are pretty wide. When you are trading options that are less than a dollar (like I was), it is not uncommon for the bid-ask spreads to be almost a dime. I was trading just outside of the money because if you go too far out of the money the options are pennies and the volume/spreads are even worse. But on my 0.40 (or so) options, a dime spread on bid-ask means that you lose 25% right away as soon as you buy the option. This is something to keep in mind.

The other thing about BITO is that it trades during regular stock market hours, but bitcoin actually trades around the world 24-7. So if you are trading BITO you need to be careful that you don’t get stuck. If something happens Friday night you are stuck until Monday when BITO will just gap to catch up. This is not a big deal if you are in a strangle.

The last observation about BITO is that when I watch it in real time right next to the actual bitcoin, it is not always 100% the same. I believe that it tries to remain the same, but I think this is based on trader arbitrage and not because it is actually connected to bitcoin the way SPY is connected to S&P or QQQ is connected to Nas100. So there are minor differences. The only time it makes a difference in my experience is when I am trying to exactly time an entry or exit and I see bitcoin make a slight move that BITO is slow to mirror. Perhaps all of this will get a lot better when they start a more “official” ETF that has better connections and more volume.

I hope everyone has fun and profits trading bitcoin…


A dime is 25% of $0.40.

The “option seller (the house)” gets that 25% right away?

Is there a rule of thumb based on the bid/ask spread, for rejecting an option?

Thanks for the discussion!

Not exactly. The spread is caused by all the potential buyers and all the potential sellers. At any given time you have people who put in orders to buy an options contract and of course, they try to pay as low a price as possible. You also have people who want to sell the same contract who put in orders and they want to sell for as much as possible. Buyers keep offering to pay more and sellers keep offering to receive less until someone takes them up on their offer and a trade is filled.

When you have a lot of volume, literally millions of people wanting to buy and sell with everyone adjusting their price until a sale is made, the difference between the buy price (bid) and the sell price (ask) gets really close, often just one or two pennies. But if you don’t have a lot of volume and there is just a handful of buyers and sellers then the difference between bid and ask can get pretty wide.

On the BITO options, I would often put my order in right in the middle, and if I’m the one trying to buy then the advertised bid price goes up exactly to my bid price. Or if I’m selling it’s the ask price that drops down exactly to my price. Then I wait and often nothing happens until someone takes my price or I cancel my order.

Now, who gets the spread? If you willingly pay up a dime in order to buy an option contract right away, then you gave up the dime and the seller gained the dime. But it would not be correct to say that the seller (receiver of the money) always captures the spread. If you really want to sell your contract and you’re afraid the price is running away from you then you accept the lower bid price in order to get out as quickly as possible. Essentially a “market” sell order. In this case, the buyer is the one who got the dime (bought at a dime discount) and you as the seller “paid” the dime in order to get out.

The thing is that you cannot think of the bid-ask spread as being something different from the “correct price.” The correct price is always the price that is paid. If it is the buyers deciding to pay the ask, then the ask price is correct (and the price moves upward). If it is the sellers deciding to accept the bid, then the bid price is correct (and the price moves downward).

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Okay, so here is a chart showing the historical volatility on Bitcoin/BITO. Circled on the lower right is the 15 day period where I did my strangles. It really was 1.5 strangles, not 2 strangles because I only bought the call once.

Now, on any strangle, it doesn’t matter which ticker or index you are using, all you care about is volatility. If the price moves big then you make money. You don’t care if it moves up or moves down and you don’t care why it is moving. You lose money if the price stays relatively close to the same and just moves mostly sideways.

The period of time that I played in BITO was exactly 15 days, or basically half a month. Now look at the overall chart which goes back to May of 2022. Pick almost any period of time that is about the same as the period I circled. You could have made money all over this chart. Why? Because Bitcoin/BITO has been very volatile. There are many places where you could have made much more than I did during which the movement was only +/- 8%.

Now, keep in mind, there is no such thing as a sure thing. I can tell you how much you could have made (past tense), but this may have no relation to how much money you will make (or lose). If everyone started doing this, then the premiums for BITO options would go up so that it becomes harder to make money. As it is the premiums are pretty high because of the volatility and it’s even worse because of the bid-ask spreads that I’ve already discussed. But one thing about Bitcoin that may be a bit unique among tickers is that the premiums will not flux wildly due to earnings release dates (because there are none) so they should stay relatively even all year long.

Now 56.5% sounds like a great profit, but actually for options it’s pretty small given the amount of movement on the stock price. If I played a strangle on SPY and got a movement of 8% my profit would be like 400% or 500%. Basically 10x the profit on the BITO strangle. On SPY I only need about a 2% move to get 50%+ profit on a strangle.

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I found out that the new ETFs that they are talking about will be tied more directly to bitcoin, BITO is tied to bitcoin futures, which may be close enough but it is not exact which is why there are slight differences that I noticed. The main thing I hope for in a new ETF is that a lot more people use it so that the volume is much higher than on BITO. Bitcoin went down recently because SEC announced that they were delaying consideration of the new ETF. Most people seem to think that it will eventually happen, but now we are depending on Government bureaucracy to get their act together.