With Sky-High Volatility, Here’s How To Generate Income On Bitcoin

Investors rushed to obtain their coins from unregulated sites after the collapse of FTX, the second-largest cryptocurrency exchange in the world. In just two days, Bitcoin lost 24% of its value.

Investors can sell options on the Proshares Bitcoin Strategy eTF ( BITO) to generate income as the crypto market slows down and implied volatility remains high.

Investors can sell the 7-strike put expiring March 17, with a price of BITO trading at 10.15 on Thursday’s close. Investors will earn approximately $65 per lot by selling this put. This is the maximum profit that investors would receive if BITO trades exceed 7 at expiry. This trade has a break-even of 6.35.

Bitcoin must trade below $11,500 to lose more than 30% by March, as a benchmark.

You get a great deal on your options

This trade is attractive due to its high volatility and high skew. It can make money if bitcoin falls, stays neutral, or rises only moderately before expiration.

These options are very expensive due to their implied volatility of 96%. This is because BITO’s 30-day realized volatility, which includes the entire FTX mess, is only 72%.

Investors are eager to see if the next crypto exchange or fund with excessive leverage drops. However, it is difficult to imagine the market being taken by surprise at this stage unless there is an overwhelming contagion effect. Volatility should decrease in the next few months, unless there is a significant new catalyst.

The break-even price for Bitcoin in this trade may be lower than $11,500. Bitcoin futures are trading at a discount, even though they should be traded at a slightly higher price than bitcoin’s spot.

The December and November contracts, which BITO holds, trade at 1% and 2% below BTC’s spot prices, respectively. The Grayscale Bitcoin Trust ( GBTC) has a huge discount of 40% that is unlikely to disappear anytime soon. However, futures must converge to bitcoin spot prices on expiration. The backwardation will provide a slight tailwind to the price BITO over the next months.

The CFTC regulates Bitcoin futures trading on CME. They don’t have the solvency risk associated with trading cryptocurrencies on unregulated exchanges.