In this column, we've mainly looked at some of the standard option trades like bull put spreads and covered calls. Today, we are going to look at one of the less common option strategies — called a put ratio spread — and apply it to a bitcoin ETF. It allows for slightly negative action in bitcoin that can turn a profit.
What Is a Put Ratio Spread?
A put ratio spread is an advanced option trade and is generally not suitable for beginners, but it can have its place within an option portfolio.
The strategy involves buying one put option — at a higher strike price — and selling two put options at a lower strike price, both with the same expiration date.
It is generally considered a mostly neutral strategy. It has the ability to make a profit in up, down and sideways markets, but the timing is crucial for success.
The trade is placed when the trader thinks the underlying stock, or in this case the bitcoin ETF, will be stable and not drop below the short put strike at expiry.
A fall in implied volatility will benefit the trade. It can also be profitable if the stock stays flat early in the trade.
The main risk with the trade is a sharp move lower early in the trade.
Let's look at an example using the iShares Bitcoin Trust ETF.
Options Strategy To Profit On Bitcoin
On IBIT, we could buy the Sept. 19 put with a strike price of 65 for around $2 and sell two of the Sept. 19, 60-strike puts for around 80 cents each.
Since we are selling two contracts at 80 cents, or $1.60 total, but buying one at $2, the trade results in a net debit of 40 cents per share, or $40 total.
This is the maximum loss above a stock price of 65. Basically, all the puts would expire worthless, and the trader loses the $40 premium paid.
The downside risk, however, is a different story. The break-even point there is 55.40 at expiration, and losses occur if the bitcoin ETF ends up below that at expiration. In the unlikely event that IBIT went to zero, the maximum loss would be $5,540. Of course, most traders would employ a stop loss long before then.
A tent-shaped profit zone exists between 55.40 and 64.60, with the maximum gain of $460 occurring at a price of 60 for IBIT at expiration.
Managing The Trade
This strategy should move fairly slowly unless there is a sharp drop in the stock price. The trade starts with a delta of -2, which means it is roughly equivalent to being short two shares of IBIT, although this will change as the trade progresses.
A minor pullback in bitcoin gives the ideal scenario. A big move forward isn't a disaster, though. The losses would be minimal.
In terms of a stop loss, I would close the trade if it was down $120 to $150.
According to the IBD Stock Checkup, IBIT has a Relative Strength Rating of 91.
Please remember that options are risky, and investors can lose 100% of their investment.
This article is for educational purposes only and not a trade recommendation. Remember to always do your due diligence and consult your financial advisor before making any investment decisions.
Gavin McMaster has a masters in applied finance and investment. He specializes in income trading using options, and is conservative in his style. He also believes patience in waiting for the best setups is the key to successful trading. Follow him on X/Twitter at @OptiontradinIQ.
