(Edit: I believe I did discover a big cause of the discrepancy – dividends on BITO. ThinkOrSwims thinkback tool was showing numbers without dividends.)
Back on November 12, 2022 I made a post on the collective2.com forums about how I thought Bitcoin could be at a good buying point. I think whether Bitcoin succeeds or fails in the long run it will likely have reduced volatility eventually. However, I found that each time after Bitcoin dropped 70% the next 2 year return was an average of 2,595%. I don’t expect that to be the case, but I think the odds of a decent return are good enough to throw some money at. Since I made this point a little less than a year ago the return on Bitcoin has been about $27,157/$16,746-1 = 62%. That ain’t bad! But I wonder how would I have done had I replaced by Bitcoin purchase with BITO options back in November 12, 2022.
In the image below I can see BITO option prices from November 14th, 2022 for the options expiring January 17th, 2025. Let’s say I bought the 6 strike call for the ask price of $5.80. Instead of buying one Bitcoin for $16,590 I’m going to convert it to BITO options in this scenario. So $16,590 / $9.81 / 100 = 17 contracts. Buying 17 contracts at $5.80 leaves $9,860 in option premium and $6,730 in cash. If we then fast forward to today the option contract is worth $7.10 if we sell at the bid and $7.9 if we sell at the mark with intrinsic value of $7.94. I’ll value it at the intrinsic value for the purpose of this since it could be exercised if I owned it.
Results and Conclusion
(7.94-5.80)*100*17 = $3,638 profit trading the options but could have used the $6,730 in cash on other things and started with $9,860 in option premium.
Buying BTC would have yielded $26,948 – $16,590 = $10,358 profit.
Buying BITO would have yielded $16,590*(13.84-9.81)/9.81 = $6,815.26
For the option strategy to have worked well for this window and match a plain BTC purchase would have required the spare cash invested in such a way that it made a return of almost 100%. To match the BITO return it would have required a roughly 50 percent return. That isn’t encouraging. I would have thought the results would be a bit better. I could have gone for a higher delta trade, but even if I used all the available funds to buy more contracts the return would not have been as good as plain Bitcoin. If I took the full $16,590 and bought 28.6 contracts the profit would have been only $6,120 and a drop to $6 in BITO would be a 100% loss at the time of expiration. Maybe I should cool it on the option purchases for BITO for now. There is definitely something I may be missing.
Something Is Wrong Here (Update)
Something just isn’t making sense. I think I may have found part of the problem. If I look at the price of BITO on November 14th, 2022 the price was $9.81. However, this is the price without adjusting for dividends. If I look at the price adjusted for dividends the price on that date was $8.34. So holding BITO would have had a profit of $16,590 * (13.84 – 8.34)/8.34 = $10,940 which is right in line with Bitcoin. Most of the difference likely comes from time of end of day calculations etc. This is also where much of lost profit of the options is coming from, dividends. This is a good reminder that BITO held in a taxable account is not as good for a long term holder as Bitcoin if you expect gains. The money I recently moved to my SEP by selling BTC may now be converted to BITO to maintain exposure. The loss of dividends which have been substantial are where the hidden cost is. Once again the market is acting pretty efficiently and I feel like the dunce.
The benefit of BITO in a taxable account is that I can still borrow against it when needed. This likely what I should have done to maintain my crypto exposure while moving funds in to my SEP. In my SEP and IRAs I don’t mind holding BITO since the dividends won’t be taxed. In my taxable account the benefits of BITO is that I can borrow against it without selling or transferring to some shady party like Celsius. However, the dividends will get taxed and the management fee could be avoided by holding actual Bitcoin. I’m actually quite torn on the ethics of Bitcoin. I don’t think it is all good or bad. One benefit of BITO is that I am not holding direct Bitcoin and likely not pushing up the price of Bitcoin itself increasing my carbon footprint or entering in a market where there are certainly some bad actors. So I may buy BITO with the $9K of options and put the $15K in my SEP into BITO and buy a little extra BITO in my Roth to make sure I have the equivalent of about 1 Bitcoin exposure to buy and hold BITO. I forgot I also put about $5k in my HSA due to BTC sales.
https://www.npr.org/2023/09/15/1197954055/axie-infinity-north-korea-ronin
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