These days it seems like Bitcoin (BTCUSD) is everywhere. Retail and institutional investors are snapping up coins, investing in companies that hold Bitcoin on their balance sheets, and trading ETFs. It seems the leading cryptocurrency by market capitalization is inescapable, which is both frightening and fascinating. Bitcoin is also incredibly volatile.
The introduction of about a dozen ETFs that track the spot price of Bitcoin back in January 2024 has been a huge catalyst for crypto. The leader of that ETF pack is the one brought to market by Blackrock’s iShares ETF unit, the behemoth of the managed investing world. Its Bitcoin ETF Trust (IBIT) has more than $70 billion in assets under management.
It also trades nearly $3 billion a day in volume. If we apply some quick math, that implies that the average IBIT investor holds that ETF for about 20 days. That’s it. I can and do trade Bitcoin ETFs and many other funds and stocks. But in this case, I want to try to “own” IBIT for a while. Several months to start, then maybe years. But that risk!
This technical chart below is not the best-looking one I’ve seen lately. In fact, I get a very “toppy” message from it. This makes it tough to open a position in IBIT with the intent to hold the fund for a longer time frame.
How Can You Buy Bitcoin with Less Risk?
I wanted to take the Bitcoin plunge, but I wanted to do it my way. I take a risk to make a high return, but I define my worst-case scenario up front. And since the options market has exploded in popularity and liquidity along with Bitcoin itself, I started looking into collaring it.
As a refresher, a collar is where you buy a stock or ETF and accompany it with a pair of option contracts. One of them is a put purchase, which means for a set period of time, you can sell that underlying asset at a specific price. This is essentially the options market’s version of an insurance policy.
The other part of the collar is the “covered call” which simply means that I take in some cash now in exchange for the obligation to sell the stock or ETF if it crosses above a specific price level before that option’s time runs out (“expiration date”).
I have owned an IBIT collar for several weeks, but for this article, I’m replicating my process for educational purposes.
How to Put an Options Collar on the IBIT ETF
This table from Barchart, like most options tables, is quite busy. That’s because there are so many options to choose from, literally and figuratively. Here’s where to focus:
- IBIT traded for about $60 a share at this snapshot in time. One option contract represents 100 shares of IBIT, so to do this cleanly, I’d need to spend about $6,000 to buy the minimum amount of IBIT to complement that position with a collar.
- The options combination I picked out for this example is the one at the top of that table above. Both options expire on Dec. 19, 6 months from now.
- The call is struck at $75 and the put at $60. That’s my range if I buy the put and sell the call. I bring in $3.90 for being willing to sell IBIT during the next 6 months at $75 a share. With the fund needing to appreciate 25% for that to be possible, I say, “bring it on!” That’s a high-class problem.
- It would cost me $7.70 to have the right to sell IBIT at $60 during the next 6 months. That said, if I were less risk-averse, if you look three rows further down, the puts struck at $55 cost only $5.30 a contract. Since each option contract relates to 100 shares of IBIT, that means the first example costs $770 for that protection. Or, I can pay only $530 for the $55 strike puts, but that means I might have to sell IBIT for $500 less than the original contract I mentioned above ($60-$55 times 100 shares).
Let’s sum this up, using that original example:
- It costs me about $60 a share for 100 IBIT shares.
- It costs me $7.70 a contract for the protection (puts).
- I receive $3.90 a contract for capping my upside (calls).
- The next options cost, in round numbers, is about $4 a share ($7.70-$3.90).
- So, my range of outcomes is $75-$4=$71 best case if called, and $60-$4=$56 is my worst case. Remember, IBIT was a $60 purchase in this example. So, that’s $11 of upside, $4 of downside over 6 months. Nearly a 3:1 ratio. And that’s nearly 20% IBIT upside in 6 months, versus less than 7% downside.
The Bottom Line
For an ETF that was trading at $43 in April, I like this tradeoff. Because I can always trade around it. This is potentially the start of a longer-term position. We’ll see. But the key here is that by using the flexibility of an option collar, we can potentially tame the volatility inherent in some high-flying assets, while also taming our own emotions related to the risk of investing.
On the date of publication, Rob Isbitts had a position in: IBIT . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
