Since the recent election, Bitcoin’s value has surged by 53%, rewarding those who believed early on and leaving others regretting not investing sooner.
This positive trend could persist as Donald Trump enters his second term as President. He’s potentially the most crypto-friendly president the nation has seen, with evidence including the launch of the $Trump meme coin and consideration of a strategic Bitcoin reserve.
However, Bitcoin’s significant appreciation means a potential downturn could be particularly damaging to investors, especially those who recently entered the market.
Jack Ablin, Chief Investment Officer at Cresset Capital, which manages $65 billion, suggests strategies for gaining exposure to Bitcoin’s potential gains while mitigating downside risks.
Ablin advises clients to utilize a collar option strategy when investing in Bitcoin. A collar involves purchasing a put option for protection against price declines while simultaneously selling a call option to generate income. The income from the call option can reduce or even eliminate the cost of the put option.
“It’s an excellent way to cautiously enter the Bitcoin market without risking significant losses,” Ablin explained to Business Insider.
Understanding the Bitcoin Collar Strategy
To implement a collar trade, you first need to own the underlying asset: Bitcoin. Ablin suggests using the iShares Bitcoin Trust ETF (IBIT). Bitcoin ETFs provide a convenient method for cryptocurrency trading without requiring specialized platforms or direct asset storage.
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Next, purchase an out-of-the-money (OTM) put option, meaning its strike price is below the current market price of IBIT. If IBIT’s price drops below the put option’s strike price, you can exercise the put and sell your ETF shares at the strike price, thereby limiting your losses. Think of it as insurance, guaranteeing a sale price even if the market crashes.
To potentially benefit from price increases, sell an OTM call option. This gives someone else the right to purchase your IBIT shares at the call option’s strike price. Should IBIT’s price exceed that strike price, you are obligated to sell your shares at that price, essentially at a pre-determined level. You still profit, but your upside is capped.
While purchasing a put option incurs a cost, selling a call option generates premium income, which can significantly offset or completely cover that cost.
For example, if IBIT shares cost $60, an investor might buy a put option with a $55 strike price for $2. This ensures they can sell at $55 even if the price falls to, for instance, $40, within the option’s timeframe. They could also sell a call option with a $65 strike price, receiving a $2 premium. If IBIT increases to $68, they must sell at $65. They still gain 8.3% (from $60 to $65), but that is their maximum profit.
Ablin advises investors employing this strategy to purchase options that expire in one year. This provides sufficient time for market developments, like regulatory changes, to impact the investment.
A Strategy of Cautious Optimism
For investors who accept a limit on potential gains in exchange for protecting against significant losses, the option collar offers a compromise.
Ablin believes this is also beneficial for those seeking Bitcoin exposure but wanting to minimize volatility.
Ablin highlights the benefits of the bitcoin option collar, recognizing the potential instability given quantum computing advancements that may compromise Bitcoin’s blockchain security. Also, Bitcoin has historically seen drawdowns of over 80%. Using a collar strategy to limit potential losses might be a prudent approach.