Bitcoin burst out in October 2023 as fresh crypto mania took hold.
Through its peak in March this year, the ProShares Bitcoin Strategy ETF (BITO) gained 150%. (BITO tracks the futures price of Bitcoin.)
But that rally’s strength put BITO well into overbought territory…
Buying momentum reversed. BITO rolled over, making a series of lower highs and lower lows.
And as traders, we rode this downtrend for a 100% profit in my options advisory, The Opportunistic Trader.
So today, l want to show how the trade played out…
Not as Planned
After reversing from its March high, BITO transitioned into a long-term downtrend.
The 50-day Moving Average (MA, blue line) steadily trended lower. The 10-day MA (red line) bearishly tracked below it.
Then in mid-July, a countertrend rally against that downtrend began to look overstretched. So we saw it as a good opportunity to get into a short BITO trade.
Using options, we looked to profit from BITO’s stock price falling…
To achieve that, we bought a BITO put option on July 16. A put option increases in value when the underlying asset falls.
ProShares Bitcoin Strategy ETF (BITO)
Source: e-Signal
As you can see in the chart, our entry coincided with the Relative Strength Index (RSI) pressing up against resistance (green line) – an important level.
When the RSI reverses off this level, it can often set off another leg down.
Yet we entered the trade too early. The RSI zigzagged across this resistance level as BITO continued to climb.
Finally, the RSI broke lower and gained traction in the lower half of its range. And BITO reversed and started tracking lower, too.
But BITO counter-rallied from a lower low in early August. Happily, this move petered out when the RSI couldn’t break through resistance.
As the chart shows, the reversal from that resistance level set off another leg down.
Take another look:
ProShares Bitcoin Strategy ETF (BITO)
Source: e-Signal
Then the RSI formed a ‘V’ from oversold territory (lower gray dashed line). That warned us of a potential bounce.
So we closed out the position by selling our put option on September 6.
Altogether, we generated a 100% gain from the trade.
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The Benefit of Options
We generated this high return by using options. Options magnify profits and losses.
They also require a move to happen in a specific time frame… Our options would have expired on September 20.
Had our anticipated down move not played out soon enough, we ran the risk of our option expiring worthless.
Yet one of the key benefits is that we always know our maximum potential loss – that’s the premium we paid for the option.
That’s important when you’re trading something as volatile as Bitcoin.
And in the end, winning trades like this one show how you can use options to quickly grow your trading account.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict