As I write this, Bitcoin is up about 200% since April 1st of this year. How many investors have successfully added to their stake during this time? I don’t know the number, but based on the discussions that I see, I would say the answer is “very few” unless they are using a technical system or a regular investing system like DCA.
“Buy the Dip” everyone says. Buying the pullback or “the dip” is emotionally difficult to do. You’re trying to find that balance between not jumping on at too high a price, vs. not being run over if the price migrates to an actual downtrend. Unfortunately there is no “all clear” bell that goes off when the bottom tick of a correction is printed; normally this is the point of maximum pessimism that the former bull move is over and the Bears might actually be right. Unless you have a trading system that objectively tells you where/when to enter on a pullback, you will forever struggle with this tug of war in your head as you seek to “buy the dip.”
But what if you didn’t have to nail the exact bottom of the pullback to make money? What if you actually got PAID by the market to buy BTC on the pullback?
Something that I’ve been excited about is the potential of the crypto market to apply the same empowering trading methods that equity retail investors have been using for decades…or to put it a different way, I’ve been waiting for the crypto market to “grow up.” I’ve already talked about the power of Futures contracts to create the perfect instrument for leveraged directional trades and we’re seeing new crypto futures vendors release every week to compete with BitMEX….now we are starting to see some actual vendor solutions to leverage the advantages of Options in the bitcoin market, and this will only increase with institutional involvement.
At this point you might be asking, “OPTIONS?! What are those?” Don’t worry about the specifics for right now, just know that if you’ve ever bought an insurance policy in your lifetime for your car or home….or if you’ve ever bought a ticket to a sporting event, you’ve already bought and sold options already.
For those that have some experience with options, you might know that there are two different types, puts and calls. I don’t want to lose you out of the gate right away before I show you the power of these, so I’m not going to differentiate them just yet….for this example I’m just going to use a gender-neutral pronoun of “OPTION” to describe the strategy, and we’ll fill in the details and expand the nomenclature in subsequent posts.
Now if you have any experience with options at all, you’re probably used to hearing about an option as a leveraged stock substitute, such as “Amazon stock costs $1950 a share, so I’m going to buy an OPTION for the next three months which will allow me to control the gains of one hundred shares for a fraction of the price.” That’s the usual application that people learn, which is as a leveraged stock substitute. This is called a “long” option trade. And we can do the same thing with Crypto, we can control the gains of one Bitcoin for a fraction of the price as a leveraged spot substitute, but here’s a little secret….none of the professionals do it that way.
The professionals turn the game inside-out by running their trading business as an insurance company. We like to sell a wasting asset (the OPTION) to someone else and our goal is never to pay a claim…just like a real insurance company. We go back again and again and keep selling these wasting assets to someone else (usually someone trying to use the option as a leveraged asset substitute) where they consistently expire worthless, releasing our obligation. We just continue to harvest the premium on a regular basis and crank the wheel.
So how does this relate to our “buy the pullback” problem? The current price of Bitcoin as I write this is at $12,400. It’s breaking out again and you don’t want to “chase” the price. You would RATHER pay $11,000 for your next entry on BTC. How about being paid for that pullback?
Let’s view the options “chain” on a crypto broker (Deribit) to see what the “market” is for an “option” at the $11k level:
Yes, you could actually be paid somewhere over $400 to offer to buy Bitcoin if the price was at or below the $11,000 level at expiration just over two weeks away. There are three things that would happen at this point:
- The price continues higher and your option expires, releasing your obligation to buy BTC at $11k, but you keep the $400 and earn 3.6% on your capital for those two weeks.
- The price comes down to about $11k on expiration day; you still keep the $400, but by this point you can decide whether or not you want to take “assignment” of BTC, or just close the position (for whatever it costs to close down but it should be well below $400 by this point) and book your profit.
- If the price goes BELOW $11k by expiration on July 26, then you can decide whether to still accept assignment to buy BTC as long as the option has not yet expired, or you can close down the position early for whatever the differential is between $11k and the current price of BTC below that level. Either way you still have the original $400 credit to help offset that cost.
This is how you can get “Paid for the Pullback.” Now I should mention that if you run an insurance company like this, that you must be OBSESSIVE about risk management if you want to remain in business. Being a deer in the headlights and not acting proactively to protect your capital is no way to be a professional, so you must know at any given point when the trade is not working for you and you’re better off stepping to the side. This is why I will only play this strategy with an uptrending asset NOT in the grip of a Bear market.
And guess what? It gets even better. Once you have at least 1BTC in assets, then you can “rent out” your Bitcoin and earn income from that as well! These are some of the simplest and most powerful options strategies that professionals use, which allows them to maximize their alternatives to earn regardless of what the market is doing.
As with everything in investing, there is a price to utilize these “power tools” of investing, and the barrier to entry is knowledge. Stay tuned as I will be putting out a lot more material on this topic in the near future to help crypto investors assimilate these powerful strategies and techniques.
Get paid for your next pullback.