The crypto markets are very quiet this time of year. So, let's take an excursion into exploring bitcoin options & futures as there are some differences with trading options on bitcoin as opposed to trading options on Apple, Amazon or another company, commodity or index.
Let's start with a thought experiment. Assume the price of bitcoin is at $10k. Assume you buy both a 6 months call option and a 6 months put option; both with a strike price of $10k. Assume you can buy these options for a price of 0.2 BTC each; totalling your investment to 0.4 BTC or $4k. Next, we assume the price of bitcoin is going to rise, within 6 months, to $15k.
The call option will then be worth $5k or 0.33 BTC ($5k/$15k). The put option will expire worthless. So, your investment has turned out to be profitable in USD (+1k), but unprofitable in BTC (0.33 - 0.4 = -0.07).
However, should the price of bitcoin fall from $10k to $5k, then your call option will expire worthless and your put option will now be worth $5k. The difference is that this $5k put option profit will now equal 1 whole BTC. This time your investment has turned out to be equally profitable in USD (+1k), but much more profitable in BTC (1 - 0.4 = +0.6 versus -0.07).
Conclusion 1: put options are more profitable than call options, measured in bitcoin.
Conclusion 2: never write put options as they can turn against you unpleasantly.
Okay, buying put options is the way to go. Since I'm wildly bullish on bitcoin something else must be done for a long position.
Let's use perpetual futures for our long position and do the same thought experiment.
We buy 1 BTC in futures and hedge this with 1 half year put option for 0.2 BTC.
At $15k the futures position will be (10000/10000) - (10000/15000) = 0.33 BTC for a total profit of 0.33 - 0.2 = 0.13 BTC
At $5k the futures position will be (10000/10000) - (10000/5000) = -1 BTC for a total loss of -1 + 0.8 = -0.2 BTC.
Conclusion 3: also with futures, the shorts - as measured in bitcoin - run much faster than the longs.
Conclusion 4: by hedging our bitcoin futures position with an equal amount of put options we have created at least some protection.
By now, it seems tempting to conclude that you should only open positions with either futures or options when you expect a serious downtrend. However, that may be too negative. Let's do another example. Suppose we go from $10k to $100k and we invest 1 BTC in futures, the profit will be: (10000/10000) - (10000/100000) = 0.9 BTC. Now that looks already more interesting. But, in order to profit spectacularly, some leverage is going to be necessary.
When you believe, like me, that bitcoin is going to be the new gold, the ultimate financial safe-haven and possibly even our new money; when you believe harder money is the better money. When you expect bitcoin to go to 1 million USD and more, then it seems to make sense to let a moderately leveraged futures position run for a couple of years; while intelligently increasing and decreasing that leverage, next to protecting and increasing your position with put options. Exactly how much and when to increase or decrease your futures and put options positions must be the function of technical analysis. It makes more sense to me to hold a core position that you regularly adjust, than an all-in/all-out type of trading. That said, it would be nice to develop some sort of indicator or set of rules for managing that core position.
