Is It Time to Fade the Bitcoin ETF Hype?
Asset managers and investors have been eagerly awaiting the launch of a spot bitcoin ETF for over a decade. Finally, their wish has come true with the recent approval from the SEC. However, it may be wise to consider a bearish options trade that benefits from a decline in bitcoin and related stocks.
The Run-Up and the Fade
The approval of a spot bitcoin ETF marks a significant moment in the cryptocurrency world. On day one of Bitcoin ETF mania, U.S.-listed bitcoin ETFs saw nearly $5 billion worth of shares traded. However, there was an excessive surge in anticipation of these ETFs being launched, leading to an overbought market. While long-term believers in bitcoin may see its potential for growth, short-term indicators suggest a pullback is imminent.
A Put Spread on Coinbase
To express a bearish view on bitcoin, you can use Coinbase (COIN) as a proxy. By buying a put spread, you can hedge your long bitcoin exposure and define your risk in the trade while reducing hedging costs. In this example, you would buy one February regular expiration COIN $120 put option for $6.60 and sell one February regular expiration COIN $90 put option for $1.10. This creates a net debit of $5.50 per spread.
The Mechanics of a Put Spread
A put spread involves buying the closer strike (higher price) and selling the further strike (lower price). This strategy limits your profit potential but allows you to collect options premium to offset costs. In this case, selling the $90 put option helps offset the cost of buying the $120 put option. The decision to sell at the $90 strike is guided by technical analysis, such as the position above the 50-day moving average.
Hot Take: Considering a Short-Term Pullback
While the launch of a spot bitcoin ETF is undoubtedly a milestone, it’s essential to be cautious about the hype and potential overvaluation of the market. Short-term indicators suggest that a pullback may be on the horizon. By utilizing options trading, such as a put spread on Coinbase, you can take advantage of this bearish view while managing risk. Remember to consult with a financial advisor before making any investment decisions.
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