How to use time and volatility to your advantage

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it's crucial to make informed decisions.

Note about IBIT options: While most European investors cannot directly trade the IBIT ETF due to MiFID regulations, they are allowed to trade IBIT options under these rules, providing an alternative way to gain exposure.

Example: IBIT diagonal call spread

Using IBIT as our example, let's construct a diagonal call spread based on the current market conditions:

• Buy IBIT April 17, 2025, $51 call at $7.48
• Sell IBIT March 21, 2025, $60 call at $1.85

Key strategy considerations:

• Max risk (net debit): $5.60 per share/option ($560 total for 1 contract), which is a defined risk because the maximum possible loss is limited to the initial cost of entering the trade, with no additional margin or exposure beyond this amount.
• Max profit: Estimated at $406.15 if IBIT reaches $60 by March expiration, though a rise in implied volatility could further increase the overall value of the strategy.
• Breakeven price: Adjusted above $55 at expiration, as the net debit paid influences the price at which the strategy begins to generate profit.
• Probability of profit: 52% based on implied volatility and price action.

This setup allows traders to benefit from a gradual rise in IBIT’s price while reducing cost and risk compared to a long call position. By selling the shorter-term call, the trader collects premium, helping to offset the cost of the long-dated call.

Implied volatility considerations

The success of this strategy also depends on implied volatility (IV). Current IBIT options data shows:

• IV rank: 10.1% (low)
• IV percentile: 5%
• Implied volatility: 50.55% (+1.59%)

With IBIT’s IV rank below 20, a rise in implied volatility could enhance the value of the long call, benefiting the diagonal spread structure.

Alternative strategies based on market outlook

• Neutral outlook? Consider selling an iron condor, taking advantage of IBIT’s range-bound behavior while collecting premium.
• Bearish outlook? A diagonal put spread or outright put option could be more appropriate if expecting a downside move.

Conclusion

A diagonal call spread is an effective way to trade a range-bound stock or ETF like IBIT with a bullish bias while managing costs and risks. This strategy provides an opportunity to profit from a gradual upward trajectory while benefiting from time decay on the short call.