Black Friday

Another rough day, as pretty much everything got hammered (with the exceptions of haven stocks Peloton Interactive, Inc. (PTON) and GameStop Corp. (GME)--both of which were up on the day after steep falls earlier). Edward Snowden took the liberty of riffing on William Carlos Williams' famous poem (This Is Just To Say) to describe the market's reaction to Fed tightening. 

Bitcoin Gets Battered

As of Friday evening, Bitcoin was flirting with a support level above $36,000. 

Readers may recall that back in October, when options first started trading on the ProShares Bitcoin Strategy ETF (BITO), we wrote a post about using it to hedge bitcoin exposure (A New Way To Hedge Bitcoin Exposure). In the video below, we used Portfolio Armor to demonstrate how to scan for optimal hedges on the Bitcoin Strategy ETF.

How Hedging Helped Bitcoin Longs

Since we posted that video, both bitcoin and the Bitcoin Strategy ETF have lost about 40% of their value. 

Let's look at how far down you'd be if you had held bitcoin or the ETF tracking it and hedged. In our video above from October, we showed an optimal collar to protect against a greater-than-25% drop by January 19th of 2024, while not capping your upside at less than 30% over the same time frame. Let's look at how that one would have protected you.

Net position value on October 21st: ($20,415 in BITO + $3,300 in puts) - $8,700 in calls = $15,015.

This was the current quote on the put options on Friday:

And this was the current quote on the call options in that collar on Friday:

Net position value on January 21st (using the midpoint of the spread for both options): $12,050 in BITO + $4,038 in puts - $2,138 in calls = $13,951. $13,951 is a 7.1% drop from $15,015. So you were down about 7% instead of being down 40%.

What To Do Now

That depends on what your prediction is for bitcoin's trajectory from here. If you're a long term bull, you can buy-to-close the short call leg of your collar to eliminate the upside cap. If you don't think bitcoin has much further to fall, you could even sell your appreciated puts and buy more of it. On the contrary, if you're now bearish on the original cryptocurrency, you can close out your positions for a smaller loss than you'd have if you weren't hedged.