Bitcoin futures and options and other cryptocurrencies have attracted my focused attention. These new trading opportunities remind me of my most profitable trading, ever.
Totally new asset classes and futures and options contracts with this much buzz don't happen very often. However, there are some things you really need to be aware of before jumping into this market.
Bitcoin futures are now listed on regulated exchanges. The Chicago Mercantile Exchange (CME) and the CBOE are now up and running with additional exchanges and derivatives expected to be listed soon. This means, if you have a futures account and broker permissions, you can trade Bitcoin.
The Bitcoin hype has already started, and I am worried that many traders will lose fortunes in the rush to "get in on the ground floor". I am warning my students that this exciting new market can also be a trap for the unwary.
I know this because I have lived this story before! I have seen even floor traders lack appreciation of how to price value.
Most Bitcoin traders are probably in for major losses. However, for every dollar lost in the futures markets, there is a dollar to be gained. Trading Bitcoin futures and options is not a get rich quick scheme for the average trader.
Is it possible to pick up quarters in front of a steamroller without getting squished? I want to tell you how I see the potential risks and rewards. This is a long story, but one that could point to a new trading opportunity for those who understand volatile markets.
If you are interested in learning about trading Bitcoin futures and options, consider joining our free Crypto Currency Trading List for traders who are curious and want to stay informed. You can stay connected and up to date on futures contract developments, regulatory issues, contract specifications and other Bitcoin information that is relevant for the independent trader.
But first, let me tell you a story about a new futures contract that eventually revolutionized equity trading.
I was a broker with E.F.Hutton in 1982 when the first stock index futures contract was available. The Value Line futures contract was listed on the tiny Kansas City Board of Trade. There was no electronic trading, no high frequency trading, there was no arbitrage, there were no baskets of stock to trade against the futures, nor was there was any algorithmic trading. And importantly, it was filled with novice traders and professional traders alike.
This was a brand new experience for the futures and equity communities.
It was wild. The futures would easily swing several percentage points above and below “fair value” of the underlying cash index. Money was flowing all over the place to those traders who abandoned all the normal trading strategies and traded the market energy. It took guts and the ability to handle abrupt and rapid price changes in a sometimes volatile and illiquid market.
But it was awesome for my clients who had the capital, resilience and knew how to trade a volatile market. However, it was very expensive for those who didn’t appreciate the “emotional volatility" they would experience.
I went on to become a trader on the CME, the CBOT and market maker on the options floor of the Pacific Stock Exchange. While at the PSE, I was elected an exchange director. I also chaired the the New Products Committee where I helped create the PSE Technology Index and brought it to trade on the options floor of the exchange.
Here is where this became very interesting. The PSE Technology index did not have a futures market...just numbers generated by the index. The options were “cash” settled which means they would be priced on the closing of the index at expiration. Normally, I would buy and sell option premium (implied volatility) and then hedge my directional risk with the underlying stock or futures. In this case there was none! So, with my familiarity with the Value Line futures contract, I used it to hedge my delta (directional risk) positions.
Value Line futures trading become very profitable in and of itself.
How? The futures market volatility was my cash register. Even though the Value Line futures contract was a very imperfect hedge for the PSE Technology Index, there was so much slop in the market, it just didn’t matter. None of the other market makers or the trading public paid attention to the Value Line futures contract.
So, as it went whipping back and forth, I priced my option values off of it, not the cash price of the Technology Index. I could buy calls and sell the Value Line Futures and then undo them when the Futures careened the other way….all without my options budging hardly at all. Low risk, high reward.
How was this possible? The other market makers and the public priced their option values off of the cash price of the stock index.
Without a background in options and arbitrage, this may not make any sense to you. That's OK for now. However, understanding how this all ties together will be valuable information as Bitcoin trading expands.
What does this mean for you and cryptocurrency futures and/or options?
We may see a repeat of the opportunities that I was able to take advantage of with the Value Line futures and options. However, it helps to understand that the opportunities present before electronic trading existed will probably never happen again in the same way. But what we don't know is the potential new trading opportunities that may present themselves.
Understanding how the cryptocurrency steamroller works is critical.
Many of my students are eager to take advantage of the "quarters" in front of the steamroller path and also don't want to keep their hands from getting trapped under the massive rollers.
We don’t know what will happen with Bitcoin futures and options, but like most opportunities, learning about the potential and being prepared while the market is still untamed presents a high risk and reward opportunity.
Bitcoin futures have some of the same features of the Value Line futures when they were first listed, and more:
The most money I ever made was trading emotional binges in the market. I believe we will have a period of great trading opportunities as Bitcoin believers drive prices during feeding frenzies and the skeptics during panic sell-offs.
This will be the wild west. Trading Bitcoin is not for the cautious strategy trader. This contract will be for the trader who has honed their instincts over the years and is able to trade the market quickly and flexibly, drawing on their intuition and years of trading experience.
This will be a very high risk market. You will need significant capital reserves to manage risk. How much? I don’t know yet.
In fact, there is a lot I don’t know! But there was also a lot I didn’t know about trading the Value Line Futures, or the PSE Technology index. But both had tremendous opportunities before the financial community figured it all out and tightened the edge for the independent trader.
Do you have the emotional resilience and risk capital to trade Bitcoin?
If you have significant trading experience, don't depend on trading for your income, are able to stay centered when everyone else is panicking or in a feeding frenzy, then consider learning how to trade this new futures contract.
I am considering a Bitcoin Research Working Group, to meet weekly online, share documents and work through the major issues that are critical to trading Bitcoin futures and options such as:
* Bitcoin distributed ledger technology
* Bitcoin futures contract
* Bitcoin options and implied volatility trading
* Trading emotional high volatility markets
* Arbitrage and spreading opportunities
* Risk mitigation with daily price limits
Now, understand, I have a lot of questions, and not all of the answers. A great deal of the information we need to know as independent traders just isn’t available yet.
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My three decades of trading experience says CryptoCurrencies are the place to be for the next year or more.
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Required Disclaimer: Commodity Futures Trading Commission: Futures and Options trading has large potential rewards, but also large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don't trade with money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system or methodology is not necessarily indicative of future results.
CFTC RULE 4.41 - HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT BEEN EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFIT OR LOSSES SIMILAR TO THOSE SHOWN.