Using the Wheel Strategy to Trade Bitcoin Options

trading-bitcoin-options

How to Trade Bitcoin Options

If you are like me and a bit hesitant about the longevity of bitcoin and various other cryptocurrencies, now you have the ability to dip your toes in the water without going through all the red tape.

Yes, there have been opportunities in the bitcoin space through periphery stocks, mostly centered around blockchain and the like, but now we have the opportunity to dabble in a pure bitcoin play, through trading bitcoin options.

ProShares Bitcoin Strategy ETF (BITO) is the first bitcoin-based ETF offering, with several others due to follow.

Regardless of your stance on cryptocurrencies, we now have the opportunity to use options to create sound trading strategies around the leading cryptocurrency. Who knows – this could be the opportunity doubters have been waiting for since bitcoin hit the headlines several years ago.

Over the next several weeks, I’m going to go over several different ways to trade bitcoin options using a variety of different options strategies. So, if you are a bull, bear or just neutral on the burgeoning sector, you now have the ability to use an options strategy that fits your overall perception as to where you think the cryptocurrency is headed.

The Wheel Strategy

The wheel options strategy is an inherently bullish, mechanical, options income strategy known by various names. The covered call wheel strategy, the income cycle, and the options wheel strategy are just a few of the many names that investors use. But one thing is certain: The systematic approach remains the same.

More and more investors are choosing to use the wheel options strategy over a buy-and-hold approach because it allows you to create a steady stream of income on stocks you want to or already own.

The mechanics are simple.

  • Sell Cash-Secured Puts on a stock until you are assigned shares (100 shares for every put sold)
  • Sell Covered Calls on the assigned stock until the shares are called away
  • Repeat the Process!

Basically, find a highly liquid stock that you are bullish on and have no problem holding over the long term. Once you find a stock that you’re comfortable holding, sell out-of-the-money puts at a price where you don’t mind owning the stock.

Keep selling puts, collecting even more premium, until eventually you are assigned shares of the stock, again, at the strike price of your choice. Once you have shares of the stock in your possession begin the process of selling calls against your newly issued shares. Basically, you are just following a covered call strategy, collecting more and more premium, until the stock pushes above your call strike at expiration. Once that occurs, your stock will be called away, thereby locking in any capital gains, plus the credit you’ve collected.

Let’s go through an example using the new bitcoin ETF to show you exactly how the wheel options strategy works when trading bitcoin options.

ProShares Bitcoin ETF (BITO)

Wheel Options Strategy – Step One (Trading Bitcoin Options)

The newly issued ETF is currently trading for 38.04.

bitcoin-ETF-options-BITO-trading-options

Let’s say we decide to go with the 34 put strike.

We can sell to open the 34 puts for roughly $2.50.

 

bitcoin-bito-cash-secured-puts

But before I go any further, I want to point out an important aspect of placing a trade. Never sell at the bid price and never use a market order. Always use a limit order. All research shows that taking this approach will tack on a significant percentage to your account over the long haul. Be efficient and don’t give up easy returns; work your orders!

By selling the 34 puts for $2.50 our return is 7.4% cash-secured.

If BITO stays above our 34 put strike at expiration we begin the process of selling puts again, thereby creating more premium to use as income or to lower the cost basis of our position. So, if we bring in 7.4% every 51 days, and we can sell puts roughly seven times over the course of a year (if the stock stays above our chosen short put strike) our annual return is 51.8% on a cash-secured basis. Again, it bears repeating, we can use that capital to either produce a steady stream of income or to lower the cost basis of our position.

But what if BITO closes below our short put strike?

No biggie. We are issued or assigned shares at the price where we wanted to buy the stock. Think about it for a sec. We collect a premium to wait for a stock to hit our chosen price.

Wheel Options Strategy – Step Two (Trading Bitcoin Options)

So, let’s say BITO closes below our 34 put strike at expiration. If so, we are issued 100 shares at $34 for every put contract we’ve sold.

Once we have shares in our possession, we begin the process of selling out-of-the-money calls against our shares, which begins the covered call portion of the wheel options strategy on BITO.

Now the question is which strike to choose. Again, ultimately it just comes down to preference. My preference is focusing on call strikes that have a probability of success ranging from 68% to 85%.

BITO-call-options-wheel-strategy

Let’s say we decide on the selling the 45 calls against our newly issued BITO shares for roughly $2.45 per call contract. Our probability of success on the 45 calls stands at 72.43%

Our static return or return on capital is 7.2% over 51 days.

If BITO stays below our 45 call strike at expiration we begin the process of selling calls again, thereby creating more premium to use as income or to lower the cost basis of our position. So, if we bring in 7.2% every 51 days, and we can sell calls roughly seven times over the course of a year (if the stock stays below our chosen short call strike) our annual return is 50.4%. Again, it bears repeating, we can use that capital to either produce a steady stream of income or to lower the cost basis of our position.

But what if BITO closes above our short call strike?

Again, no big deal. Our shares are called away, so of course, we keep our $245 per call contract, plus we are able to reap any capital gains from our stock. In this case, we would keep the $245 plus an additional $11 per share or $1,100 per 100 shares for a 32.3% gain.

Once our shares are called away, the wheel options strategy cycle ends, and the decision has to be made whether or not to continue using the strategy with the same stock.

The wheel options strategy is a wonderful strategy for those wanting to generate steady income, with lower risk compared to most options strategies. It also gives the investor an opportunity to lower the overall cost basis of a position.

The strategy isn’t a get-rich-quick strategy; rather, it’s a methodical, systematic approach to trading bitcoin options that generates consistent returns, month after month, on stocks or ETFs that you want to hold in your portfolio over the long term. Or, in this case, bitcoin.

As always, if you have any questions, please do not hesitate to email me.

8 comments on “Using the Wheel Strategy to Trade Bitcoin Options

    • Andy Crowder on

      Gustavo,

      No problem. Thanks for the question. I used the 51 days until expiration because it fit my premium goals. My preference is to go out anywhere from 20-60 days, but it depends on what I’m trading and the strategy I wish to use at the time. Earnings require a short expiration cycle, etc.. I hope this helps.

      Reply
  1. Brian on

    this sounds like some thing i would like to try.
    though never traded options .
    and could do with some help in understanding . them .
    can i get some help please.

    Reply
    • Andy Crowder on

      Brian,

      Thanks for writing in. Of course you can get some help. I would be happy to assist in any way I can. What is it that you would like to know?

      Reply
  2. Jason on

    Andy,
    I was thinking the same thing when I saw that BITO was available, but have a slightly different strategy, I bought a $30 call expiring on 12/31/21 at the time for $1,110 and sold a $43.50 call 2 weeks out. It’s not really the Wheel Strategy since I didn’t initially sell a put, but at the time I calculated that I only had a cash outlay of about 27% ($1,110) instead of $4,350 for 100 shares. I’ll adjust this position as I get close to 12/31. I looked at LEAPS, but the implied volatility was quite high, if I remember about 90%. I may consider a poor mans covered call also, but yes… I agree.. this is highly speculative and I wouldn’t want to risk much more than 5% of my trading portfolio with this strategy.

    Reply

Leave a Reply

Your email address will not be published. Required fields are marked *