Bitcoin Bulls Should Switch to Call Options, Crypto Services Provider Matrixport Says

• Matrixport says low volatility makes switching to bullish call options a viable strategy to optimize returns.
• Options look cheap as bitcoin's key volatility gauges have fallen to multi-year lows.

Crypto traders should consider rotating money out of bitcoin (BTC) and into bullish call options tied to the cryptocurrency to optimize their returns, crypto services provider Matrixport said on Thursday.

"Predictably, the crypto market has become very quiet during these summer weeks. This has caused trading volumes and volatility to fall markedly. Investors might be well advised to replace their bitcoin spot with Bitcoin options, notably upside calls, as lower volatility has made option prices cheaper," Markus Thielen, head of research and strategy at crypto service provider Matrixport, said.

"This allows locking in the year-to-date gains for bitcoin, while the call option exposure allows participating in any upside rally," Thielen added.

Matrixport was one of the few firms that have been consistently bullish on bitcoin since late 2022. The leading cryptocurrency has rallied nearly 77% this year, with the bullish move running out of steam above $30,000 in recent weeks.

Call options give traders the right, though not the obligation, to buy bitcoin at a stated price by a specific date. Put options grant the right to sell. A call buyer is implicitly bullish on the market, while a put buyer is bearish. Options prices are influenced by the option's strike, time to expiration, interest rates, and implied volatility – expectations for price turbulence over a specific period.

Low volatility play

Volatility is mean-reverting, it will make asset prices come closed to the mean prices, and has a positive impact on option prices. Hence, options are said to be cheap and traders prefer buying options when volatility is unusually low and prefer selling options when volatility is exceptionally high.

Bitcoin's 30-day realized, or historical volatility, has declined to an annualized 28%, the lowest since January. T3I's BitVol Index, which gauges expected price turbulence in the crypto over four weeks, recently dipped to 40.47, the lowest reading since at least early 2019. The present situation is in stark contrast to late 2022 when volatility was too high and options looked pricier.

More importantly, this year, a positive correlation has developed between implied volatility and bitcoin's price. So, if bitcoin's rally resumes, call options holders will likely make outsized gains on a smaller initial investment.

Thielen's note to clients suggests pocketing in bitcoin's YTD gain of 77% and using the freed-up capital to buy an at-the-money (ATM) call option with a notional value of 3% every month. This way, even if the market drops, investors would still end the year with a 62% net gain.

Buying a call lets you control the same amount of shares as buying the underlying asset with significantly less money. A call buyer pays a premium to the seller for offering protection against bullish moves. The premium paid is the maximum amount the call buyer can lose if the market drops. An at-the-money call is the one whose strike price is closer to the going market rate of the underlying security. For instance, calls at strikes around bitcoin's current market price of $29,180 are at-the-money.

"This 'Bitcoin replacement strategy’ would guarantee continuous exposure to the upside opportunity of Bitcoin through buying a Bitcoin call every month for 3% notional exposure (5*3% = 15%) while locking in this year’s gains of +77% (minus 15% for the calls), which leads to a net gain of ~62% even if Bitcoin prices retrace from here and each call loses money," Thielen explained.