Let’s Examine a Butterfly Trade I Made This Week

Let’s Examine a Butterfly Trade I Made This Week

Posted On February 12, 2021 3:45 pm

Bitcoin, along with blockchain is technology — where Bitcoin and other cryptocurrencies have enjoyed an incredible value run, garnering plenty of headlines over the past few months. 

Bitcoin’s value, relative to the U.S. Dollar has surged some 4,000% over the 52 weeks — peaking above $47,000 earlier this week. 

Now, I won’t make any predictions about what Bitcoin will ultimately be worth, but its recent rally stands in contrast to past runs, similar to what occurred in 2017, which saw its price drop some 90% from the then-$17,000 peak. 

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A big debate between coiners is whether Bitcoin (or other crypto coins) is a store of wealth akin to gold, diamonds, or a true currency to be used for conducting transactions.  People like to label things, and I think recent developments have shown Bitcoin can bridge the gap between commodity and currency. 

High-profile moves made by digital payment companies like Square (SQ)  and PayPal (PYPL), pushed this concept toward wider acceptance — announcing that they’d be buying $50 million and $100 million worth of BTC to directly keep on their balance sheets.  This is presumably the first step towards allowing customers (buyers and sellers) to seamlessly conduct transactions using BTC on their platforms without having to do cross currency translations, which carry an exchange rate and volatility risk. 

This week, Elon Musk made a bolder move, buying $1.5 billion-plus worth of Bitcoin to reside on Tesla’s (TSLA) balance sheet.  Again, this carries significant currency risk given Bitcoin can have price swings of 10% or more each day. 

However, as always, Musk is looking far out into the future, believing that Bitcoin will become the coin of the realm for future transactions, especially those across international borders. 

We have even seen major financial institutions such as Goldman Sachs (GS) issue bullish reports and build back-office infrastructure based on blockchain technology.  

I’m not very knowledgeable about Bitcoin nor, as mentioned, do I have a bold prediction for its future.   But, I see what’s going on around me and I have options at my disposal to create a low cost/high return position should the trajectory of Bitcoin keep going higher. The biggest obstacle to derailing the Bitcoin train would seem to be regulation. 

The vehicle of choice is Riot Blockchain (RIOT), a company which pivoted to mining coins a few years ago.  The stock has soared 12,000% since the election.    

I don’t want to chase this into the stratosphere.  I also don’t want to try to call a top and get myself caught in a squeeze. 

My theory is there will be a substantial pullback in the coming months, due to regulation, dilution by some of the largest holders, a security breach, or some other unseen event. 

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I’m employing a bearish butterfly spread;  A low-cost strategy with limited risk but offers tremendous upside.   If these play out over the next few months, it could return on the order of 300%. 

And the real beauty, I know my exact risk. In other words, I set the position and forget it.  No adjustments, rolls, or worrying.   

Here’s the exact set up of the RIOT butterfly: 


-Buy to open 2 contracts RIOT June (6/18) 22 Puts

-Sell to open 4 contracts RIOT June (6/18) 15 Puts

-Buy to open 2 contracts RIOT June (6/18) 10 Puts

For a Net Debit of $1.70 (+/-0.20)

Note, this is an ‘unbalanced ‘fly’, so you may need to enter as a custom order.

Here’s what a standard order ticket looks like: 

riot snapshot analysis

Here’s what the risk/reward profile looks like:

riot snapshot analysis

Note my risk’s limited to the $370 I spent while the reward’s in excess of $1,000.

Butterfly option strategies are employed very selectively, but they can deliver outsized returns. 

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About author

Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.