Sell the hype: A trade that wins if bitcoin retreats now that an ETF is finally here

Published Fri, Jan 12 202410:51 AM ESTUpdated Fri, Jan 12 202411:03 AM EST

Asset managers, as well as investors, have been hoping for a spot bitcoin ETF for more than a decade. They finally got their wish this week, but it may be time to fade that news with an options trade that wins if bitcoin and related stocks decline. The reluctant approval from the SEC follows many years of rejections and delays of various attempts to launch a spot bitcoin ETF for public investing. This good news also comes just a few months after the agency was handed a definitive loss in the courtroom. After that legal ruling, money managers had significant confidence heading into 2024 for this spot bitcoin ETF vehicle to come to fruition. That confidence translated to the cryptocurrency rising more than 70% in recent months in anticipation of an ETF. BTC.CM= 6M mountain Bitcoin's run into ETF launch That being said, I will utilize an old floor adage of, "Buy the rumor, sell the fact." I will express my short-term bearish view on the overbought and new asset class by buying a put spread on Coinbase (COIN), which is highly correlated to the price of bitcoin. (Coinbase is the leading cryptocurrency exchange platform in the United States.) Fade the hype Despite the fact that we are living in one of cryptocurrencies most notable moments (as U.S. listed bitcoin ETFs saw nearly $5 billion worth of shares trade on day one of Bitcoin ETF mania), I believe there was too large of a run-up anticipating the ETFs being launched. It indeed was a better-than-expected day for volume. I am a long-term believer in bitcoin, but I want to take advantage of the emotion in this new asset class. I believe a short-term pullback is in the works as institutional investors are still on the fence of allocating to "digital gold." I am aware of all of the forecasts of bitcoin going higher, but short term it feels overbought with resistance at $50,000. The trade In order to express my bearish view on bitcoin, I will use COIN as a proxy to bitcoin. I will simply be buying a put spread. I am using this approach as I expect a drop in both bitcoin and Coinbase's price for the next 30 days, but I do believe the cryptocurrency will regain footing in the mid $30,000 range. Buying a Put Spread in COIN: Bought one February regular expiration COIN $120 put option for $6.60. Sold one February regular expiration COIN $90 put option for $1.10. Net debit of $5.50 costing an investor $550 per spread. I like to utilize a put spread for a few reasons. I can hedge my long bitcoin exposure, define my risk in the trade, and also reduce hedging costs. I will decrease the cost of owning the bearish spread by selling the further out-of-the-money option (the $90 put in this COIN trade) and collecting that options premium. The mechanics of being long a put spread (also referred to as a "bear put spread") is buying the closer strike and selling the further strike. This creates a debit, but an investor utilizes the collection of the lower strike put sale ("premium") to offset the more expensive cost of the higher strike put. Profit is limited but, I utilized the technicals below to help guide me on where to sell the lower strike. As you can see, $90 in COIN sits just above the 50-day moving average. (Correction: An earlier version had the wrong strike price for the put option being purchased.) DISCLOSURES: (Long this put spread, no position in COIN, long bitcoin) THE ABOVE CONTENT IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY . THIS CONTENT IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND DOES NOT CONSITUTE FINANCIAL, INVESTMENT, TAX OR LEGAL ADVICE OR A RECOMMENDATION TO BUY ANY SECURITY OR OTHER FINANCIAL ASSET. THE CONTENT IS GENERAL IN NATURE AND DOES NOT REFLECT ANY INDIVIDUAL'S UNIQUE PERSONAL CIRCUMSTANCES. THE ABOVE CONTENT MIGHT NOT BE SUITABLE FOR YOUR PARTICULAR CIRCUMSTANCES. BEFORE MAKING ANY FINANCIAL DECISIONS, YOU SHOULD STRONGLY CONSIDER SEEKING ADVICE FROM YOUR OWN FINANCIAL OR INVESTMENT ADVISOR. Click here for the full disclaimer.