Bitcoin mania seems to be back in full swing, with prices rising 50% in recent weeks. So, how to trade it? After all, Bitcoin itself is extremely volatile on both the upside and downside, and the other drawback is that it doesn’t provide a steady income stream.
Luckily, using options, we can create income. At the same time, we gain exposure to blockchain technology.
Coinbase (COIN) is one of the most popular crypto stocks, and we could look at option income strategies on that stock.
Another, perhaps less volatile way, would be to trade covered calls on the Amplify Transformational Data Sharing ETF (BLOK).
This exchange traded fund is still quite volatile but should be less volatile than Bitcoin and some crypto stocks.
Let’s look at how a covered call trade on BLOK might take shape.
How To Trade Bitcoin: Constructing The Covered Call
Buying 100 shares of BLOK would cost around $5,100.
A September-expiration 55 call option was trading Monday around $1.55 per share, generating $155 in premium per contract.
Selling the call option generates an income of 3.13% in just under two months, equaling around 30% annualized.
Selling the call further out-of-the-money also gives the trade some upside potential.
If BLOK closes above 55 on the expiration date, the shares will be called away at 55, leaving the trader with a total profit of $555 (gain on the shares bought at 51 per share, plus the $155 option premium received). That equates to a 10.9% return.
Of course, the risk with how to trade this Bitcoin-linked ETF is that it might drop, which could wipe out any gains made from selling the call.
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. Gavin McMaster has a Masters in Applied Finance and Investment. He specializes in income trading using options, is very conservative in his style and believes patience in waiting for the best setups is the key to successful trading. Follow him on Twitter at @OptiontradinIQ
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