Key Talking Points:

  • Cryptocurrency equities could be poised to follow bitcoin’s recent move higher
  • Stocks like COIN, RIOT, and MSTR are highly correlated to bitcoin and ethereum
  • Implied volatility in cryptocurrency stocks is trading at a large premium to realized vol

After hitting a low of roughly $30,000 this summer, the price of bitcoin has recently come roaring back, trading as high as $55,000 this week and breaking the $53,000 peak set in September. While it’s well known to most crypto traders that bitcoin offers high volatility trading opportunities, without a liquid options market, there are few strategies we can employ to express a view on volatility aside from simply buying or selling the underlying cryptocurrency.

BTC/USD Daily Price Chart (February to October 2021) (Chart 1)

Crypto Equities in Focus Following Bitcoin’s Recent Rise

In this article I want to shift away from bitcoin’s price action and instead focus on a few cryptocurrency-related companies for which we can trade both the underlying equity and listed options. These stocks tend to be highly correlated to the performance of bitcoin and at times can be used to employ distinct options strategies from either a bullish or bearish perspective.

To understand the relationship between bitcoin, ethereum, and related crypto equities, let’s first observe the performance and correlations of BTC and ETH with crypto-related equities such as well-known U.S. crypto exchange Coinbase (COIN), crypto mining company Riot Blockchain (RIOT), and MicroStrategy (MSTR), the business intelligence firm currently holding over $3 billion of bitcoin on its corporate balance sheet.

Crypto Equities in Focus Following Bitcoin’s Recent Rise

Following the recent run higher of both bitcoin and ethereum, we can see that crypto equities have certainly lagged in performance terms, especially as we look out over a 1 and 3-month trending basis.

Now, as you might expect, these underlying symbols are more correlated to the overall equity market compared to pure crypto assets. They’re also impacted by some of the factors influencing the stock market presently. E.g. We see much stronger inverse correlations with interest rates and the U.S. dollar, among stocks like Coinbase and Riot Blockchain compared to ETH and BTC.

Crypto Equities in Focus Following Bitcoin’s Recent Rise

So, there’s certainly the equity factor at play. But, given the strong positive correlations between bitcoin and companies in the crypto space, there could be an opportunity for these stocks to trade higher, should we see this upside move in crypto continue.

Shifting to a potential trade setup, let’s look at how volatility is currently being priced in the market. As options traders, being aware of implied volatility levels can help us identify interesting opportunities. Presently, the options market in these crypto stocks is pricing in the expectation for larger moves over the next few weeks, compared to how much these stocks have moved over the past month.

Crypto Equities in Focus Following Bitcoin’s Recent Rise

We can see this when comparing current levels of implied volatility to realized volatility. For example, Riot Blockchain has an annualized implied volatility of 150% compared to its realized volatility of 60%. This represents an implied volatility premium of 75%.

Said differently, traders of RIOT options are starting to price in much larger moves than what the stock has experienced lately. This measurement of volatility is independent of direction, nor does it represent a future prediction. It’s possible the options market’s expectations for future volatility materialize, but quite often when implied volatility is trading significantly above realized, it could signal an opportunity to sell option premium. I.e., options are expensive.

So, if in fact this is what’s happening, how can we structure a trade to potentially take advantage of this premium?

Well, if you’re bullish on bitcoin and bullish these crypto companies, one idea might be to sell out of the money puts or put spreads, to take advantage of potential rich levels of volatility.

On the other hand, let’s say you’re bearish…selling a call spread is a trade that can take advantage of a drop in a stock’s price, but still involves selling ‘rich’ option premium.

Below are examples of two different options strategies that enable traders to express either a bullish or bearish view while also taking advantage of possibly overstated option premiums.

Example of a bullish short-term vertical put spread in COIN (Chart 2)

Crypto Equities in Focus Following Bitcoin’s Recent Rise

Example of a bearish short-term vertical call spread in RIOT (Chart 3)

Crypto Equities in Focus Following Bitcoin’s Recent Rise

Resources for Traders

Whether you are a new or experienced trader, we have several resources available to help you; indicator for tracking trader sentiment, quarterly trading forecasts, analytical and educational webinars held daily, trading guides to help you improve trading performance, and one specifically for those who are new to forex.

— Written by Ryan Grace, Chief Market Strategist at tastytrade

You can follow Ryan on Twitter @tastytradeRyan


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