The open interest in Bitcoin (BTC) call options on December 31 between $ 100,000 and $ 300,000 reached an impressive 6,700 contracts currently valued at $ 385 million. These derivatives give the buyer the right to purchase Bitcoin at a fixed price, while the seller is obliged to respect it.
You may think this is a great way to take a long position, but it comes at a cost and is usually quite high. For this right The buyer pays the seller of the call option an entry fee (premium). For example, the $ 100,000 call option is currently trading at 0.164 BTC, which equates to $ 9,480.
Therefore, Options traders rarely buy these options for themselves. Derivatives with longer terms are therefore usually associated with several exercise prices or calendar months.
Shown above is a real trade hosted by Paradigm, an over-the-counter trading desk that focuses on institutional investors. In this operation A total of 37 BTC as of December, calls totaling $ 100,000 and $ 140,000 were exchanged between two of its customers.
Unfortunately, There’s no way of knowing which side the market maker was on, but given the risks involved, assume that the client was looking for a bullish position.
By selling the $ 140,000 call and purchasing the most expensive $ 100,000 call at the same time, this customer paid an initial premium of $ 138,000. This amount represents your maximum loss that would be incurred on December 31st at a cost of $ 100,000.
The red line in the simulation above shows the net result measured in BTC after the expiry. Meanwhile, the green line shows the theoretical net return on June 30th.
Hence, this customer will need Bitcoin to trade at $ 65,600 or more on June 30th to recoup their investment. That figure is well below the $ 107,150 required to break even if this buyer’s call spread strategy is maintained until the end of December.
This phenomenon occurs because the call option price increase of $ 100,000 is greater than $ 140,000. While a Bitcoin surge to $ 65,600 is quite relevant for a $ 100,000 option with six months remaining, it isn’t as relevant for the $ 140,000 option.
A myriad of strategies can be achieved by trading ultra-bullish call options without the buyer having to wait for the expiration date to secure profits. If Bitcoin is up 30% in a couple of months, it makes sense for this call spread holder to reverse their position.
As shown in the example above, if Bitcoin hits $ 75,000 in June, the buyer could make a net profit of $ 23,000 by closing the position.
While it’s exciting to see exchanges offering massive maturities of $ 100,000 to $ 300,000, these numbers should not be taken as accurate price estimates backed by analysis.
The views and opinions expressed here are solely those of author and do not necessarily reflect the views of Cointelegraph. Every investment and trade movement is associated with risks. You need to do your own research when making a decision.