How To Use Options To Trade The Bitcoin Crash

The Bitcoin bubble seems to have well and truly burst and stocks like Block (SQ) have been punished this year.

So what now for Bitcoin and related stocks? Well, that’s anyone’s guess, but using options we can create trades with attractive risk to reward ratios.

Let’s look at a few examples. We look at:

1. A bullish trade with zero downside risk
2. A bearish trade with zero upside risk

Let’s take a look at a few different option ideas using SQ for our examples.

Ratio Call Backspread

A ratio call backspread is not a common option strategy, but perhaps it could be appropriate in this scenario.

The trade can be structured with zero risk in the event of further downside in the stock price and potential to make large profits if there is a strong counter-trend bounce.

Using SQ as an example, the trade could be constructed by selling one October 21 call option with a strike price of 60 and buying two October 21 call options with a strike price of 66.

Selling the 60 strike call would generate $495 in premium and buying the two 66 strike call options would cost $510. The difference between the two results in a net debit of $15.

If SQ stays below 60, both call options expire worthless leaving an $15 loss. Hence there is virtually no downside risk. SQ could go to $0 and the trade still makes $80.

Because of the extra long call option, there is significant upside potential with the trade with the upside being potentially unlimited.

The downside is that the area between 60 and 72 if SQ gets stuck in that range.

Ratio backspreads are not simple trades, so its worth paper trading this one if you’ve never done them before.

The position starts with a delta of 14, which means it is roughly equivalent to being long 14 shares of SQ stock, although that will change as the trade progresses.

Let’s take a look at another potential option strategy.

Ratio Put Backspread

The same trade can be set up, but in reverse, with zero upside risk and a large profit potential in the event of further price drops.

The trade could be constructed by selling one October 21 put option with a strike price of 58 and buying two October 21 puts with a strike price of 52.50.

Selling the 58 strike put would generate $420 in premium and buying the two 52.50 strike put options would cost $450. The difference between the two results in a net debit of $30.

If SQ stays above 58, both put options expire worthless leaving a small $30 loss. Hence there is virtually no risk above 58. SQ could go to $100 and the trade still loses only $30.

Because of the extra long put option, there is significant downside potential with the trade with profits being unlimited to the point of the stock reaching $0.

The risk with the trade is that the area between 58 and 47 if COIN gets stuck in that range.

The position starts with a delta of -9, which means it is roughly equivalent to being short 9 shares of SQ stock, although that will change as the trade progresses.

Conclusion

There you have two different option ideas on a Bitcoin related stock. These are advanced strategies so it’s best to paper trade these of you haven’t come across them before. But take a look and hopefully you see something you like.

Please remember that options are risky, and investors can lose 100% of their investment. 

This article is for education purposes only and not a trade recommendation. Remember to always do your own due diligence and consult your financial advisor before making any investment decisions.

*Disclaimer: On the date of publication, Gavin McMaster did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. Data as of after-hours, September 21, 2022.

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