Happy Thanksgiving week!

Take some profit and buy some shit on Black Friday/Cyber Monday — you’ve earned it! We have much to be grateful for.

The markets have taken a breather the last few days after the election repricing, stopping just short of $100,000 and dipping overnight Tuesday — I see no reason to believe this pause will be anything other than temporary.

So I decided to get tits long bitcoin and bought a big clip of $IBIT options. I’ve limited my downside, taken some cash off the table, and positioned my upside to take full advantage of the Trump transition and a possible gamma squeeze.

Let’s dive into the trade.

[note: this post was written before the market pulled back overnight on Tuesday. Did you buy the dip anon?

The market dashboard below is using end-of-day Monday prices — reply to this email and I’ll send you an update with the new numbers tomorrow. Just a little dippity dip before we rippity rip again.]

Market Vibes

Crypto Reads

Microstrategy buys even more bitcoin: MicroStrategy has acquired 55,500 BTC for ~$5.4 billion at ~$97,862 per bitcoin and has achieved BTC Yield of 35.2% QTD and 59.3% YTD. As of 11/24/2024, we hodl 386,700 BTC acquired for ~$21.9 billion at ~$56,761 per bitcoin.

Saylor on CNBC (10 min video): “MicroStrategy is powered by its Bitcoin treasury operations. We sell volatility through our ATM offerings, strip BTC risk, volatility, and performance from our fixed-income securities, and transfer that performance to our $MSTR equity holders.”

Trump nominates crypto-friendly Scott Bessent as Treasury Secretary: On Friday, President-Elect Donald Trump picked pro-crypto hedge fund manager Scott Bessent as his administration’s new Treasury Secretary, pending a Senate confirmation. The 62-year-old has supported Trump’s call for the creation of a strategic bitcoin reserve, as well as his broader overtures to the crypto industry. (Plus, The president-elect nominated Cantor Fitzgerald CEO Howard Lutnick to run the commerce department.)

Using bitcoin to escape Chinese Communist Party capital controls: This reads as one of the most persuasive cases for cryptocurrency as an engine of liberty rather than just as an engine for speculation. This use-case might be the clearest case of cryptocurrency actually helping to thwart communism.

How to take profit and stay giga long

I took profit on my $MSTR position to fund this trade.

With options, I can control a big bag of notional bitcoin with a fraction of the capital required AND with a predefined downside risk. If the calls expire, they expire. That’s it.

This trade is giving me cash profit from my Microstrategy position, while maintaining my giga-long bitcoin position with tons of implied leverage and positive skew. It’s free real estate.

These are the kind of high expected value portfolio management trades we can now unlock thanks to the IBIT options market. Remember this when your own shitcoin takes off for a 50x and you are feeling too greedy to lock-in your profit — have your cake and eat it too!

Plus, if some kind of weird gamma-squeeze hockey stick price movement starts bazooka firing notional volume at spot markets, these options will go parabolic faster than GME in 2020.

Follow the money. Big upside, defined risk. This is crypto investing 101.

Options can be tricky

Options are a different beast than just buying bitcoin on Coinbase.

Options are multivariable. Your returns depend on the premium you pay, the expiration, the strike price, the price action of the underlying asset, and the list goes on.

They’re just not intuitive to our feeble, degenerate brains — when was the last time you solved a partial differential equation? Yeah, it’s been a while.

I’m going to assume hereafter that you have a general understanding of options. Here’s some links again if you don’t and want to go deeper.

• Investopedia: Beginner’s option trading tutorial

• The Options Industry Council: Lots of free materials here. High quality.

The bet

I obviously think bitcoin has more room to run in this bull cycle. To optimize this hedge, I needed to make a few key assumptions.

1. I think most of that price action will occur in the next 2-4 months.

Trump’s inauguration seems like a logical event to timeline against — buy the rumor, sell the news kinda thing.

Further, if there is going to be a gamma squeeze, it stands to reason it will be most likely in the first few months that the options begin trading. The options activity will accelerate flows temporarily, before they settle into a stable volume.

Last, historically the most violent, vertical crypto moves (and memetic stocks too - GME, AMC, etc) happen over the course of a few weeks to a few months. Crypto generally sees 3-5 month bull runs, accentuated with 2-3 weeks of nonsensical blow-off tops.

2. I think bitcoin is going past $120k.

Open interest and options data indicates a reasonable probability for $120k once BTC breaks through $100k. After that it’s less clear. $100,000 is a strong psychological level — when we do break through this, things could get weird.

I am willing to hedge with out-of-the-money options to maintain the exponential upside if something insane does happen, like $150k, $200k or, inshallah, somewhere higher.

3. I want to take profit while staying long. This is not a lottery ticket.

I’m a small fish, and I play small fish games. I don’t want to get cute with a trade and end up swimming in a pond with no water. I want to get out at prices I want, when I want.

This limits us to tradfi contracts, realistically just IBIT or MSTR. Doing anything with options on-chain requires too much extra work, too little liquidity, and too high costs (I hope the new political regime will make changes such that on-chain options are a better option - the biggest frictions today are all downstream of regulatory idiocy).

Both IBIT and MSTR show strong open interest across the expirations and strike prices I’m interested in — IBIT showing slightly less favorable liquidity characteristics at the higher strike prices.

This isn’t a degenerate gamble - we have memecoins for that. I’m sizing carefully, locking in the MSTR trade, and leaving myself with room to run if (when) bitcoin pumps again.

Theta decay and Vega

Just like anything else, the price you pay for an option matters a lot. You can be right, but overpay. The price is your margin of safety.

Options prices are driven by an array of dynamic, interrelated factors.

For long calls, the time to expiration matters a lot — the option value declines at an increasing rate as the expiration approaches. The nerds call this phenomena theta decay.

Implied volatility matters a lot too — the sensitivity to volatility is referred to as vega in options.

I needed a structure that captured the directional bet I want to make, without overpaying for the vol and without accepting too much theta risk.

Implied Vol makes MSTR calls too expensive compared to IBIT

I started my search with MSTR calls, but quickly realized that IBIT was the better value for my goals.

Looking across strike prices, MSTR’s implied volatility ranged from 57% to 195%. This compares to 76% to 128% for IBIT.

The IBIT vol is still pretty high - don’t get me wrong, that is the game we’re playing — but in this particular case the higher implied vol with MSTR drives higher premiums.

Higher premiums mean less bang for the buck. Part of this is MSTR’s higher price in general, but in all cases the result is higher absolute premiums. I’d rather buy more contracts of IBIT with the lower premiums, than take a smaller position with the more insane volatility of MSTR.

February vs May

Next, I evaluated the available expirations for IBIT options, with February and May fitting my thesis the best.

February is a little tight, but offers a much lower premium (because the risk of theta decay is higher on the shorter time frame). One of my key assumptions is that the price will move alot leading up to the Trump inauguration — February expirations give me a month of wiggle room.

The May expiration is slightly more expensive, but allows for more time if bitcoin were to run further or if Trump’s first few months of policy actions are as bullish as we hope them to be.

Here’s a summary of the market when I made my trade. I’ll show the $100 strike here as its the most out-of-the-money I considered. Note the significance of the theta risk in the February contract — those extra 3 months of time make a big difference at this constant strike.

Leverage and Potential Returns

Quick summary of where we are:

1. Taking profit but want to stay exposed to bitcoin upside

2. MSTR options premiums are too expensive. So much vol, lolz

3. IBIT fits the bill, need to target a pump happening over the next 2-4 months

4. IBIT calls have similar implied vol across Feb and May expirations, solid liquidity, but I need to manage theta risk and find the right strike.

This is the part of the trade where you start to feel greedy.

The February expirations have such a lower premium (relatively speaking) across strikes, meaning I could buy a lot more contracts to increase my long exposure (delta in options nerd-speak). If bitcoin pumps soon, this would generate very strong ROI. Lambo ROI. Summers in the Med ROIs. Greed is good. Right? RIGHT?!

The risk is time — if bitcoin doesn’t move soonish, then they’re going to expire worthless.

The May expiration is much more attractive from the theta perspective, but the higher premiums reduce leverage. More time to be patient, but less contracts.

I decided to have my cake and eat it too.

I bought a blended bag of both expirations, roughly 40/60 across them. I spread my bet around further with calls at a few different strikes as well — from $70 to $100 — focusing on the contracts with higher open interest.

While not diversification in the typical sense, I liked this approach because it gives me a blend of exposure across prices and time risk.

I plan to sell or rollover my February expirations before Trump’s inauguration — sometime in mid January. The May expirations I intend to hold a bit longer, but we’ll see how the market plays out.

Right now, all signals remain strongly bullish. If that changes, I’ll update the portfolio as required.

Position Sizing Matters — You only need a pinch

Options have implied leverage. 1 contract typically equals 100 units of the underlying asset. You only need a pinch.

For the IBIT ETF specifically, you don’t control 100 bitcoins, but rather 100 units of the ETF. You still get the risk and reward surface of a typical option, including that leverage baked in, but you’re an extra layer removed from the underlying bitcoin itself.

In my case, the motivation is to hedge my Microstrategy position without losing the long upside. I really don’t need that many options to do that and get the risk/reward profile I’m looking for. Your mileage may vary.

For transparency, 50% of my MSTR take profit went to cash, 50% went to this option hedge. This options trade is less than 1% of my crypto portfolio.

I wasn’t kidding — you don’t need much when you get this much implied leverage out-of-the-box. Just a pinch.

Portfolio Update

I sold MSTR, bought IBIT calls as described. No other trades this week.