In the last three weeks, $150,000 worth of $50,000 Bitcoin Call Options (BTC) for the June and December 2021 strikes have been traded. The LedgerX Derivatives Exchange was used as an intermediary for these ultra bullish trades, but what could be the reason for this?
There are good reasons to buy options with such low odds, but paying $1,000 for the privilege of buying Bitcoin 440 percent above the current price in 18 months seems unreasonable
Even considering an annual volatility of 100 per cent, which is quite high even by Bitcoin standards, the probability of the price reaching $50,000 is less than 8 per cent.
The Call Writer Takes the Risk
The seller of this call option has an unlimited downside if the price somehow manages to exceed the $51,000 level and for this commitment, the seller receives the $1,000 up front.
By way of comparison, the December 2021 call option with an exercise price of $25,000 traded at $1,750. Such a buyer will make a profit of $13,250 if the price of Bitcoin reaches $40,000, which represents a healthy return of 650%
On the other hand, the buyer of a $50,000 strike would gain nothing from this massive $40,000 increase.
Potential justification for such a bullish transaction
Recently, crypto-media and crypto-twitter have been intensely focused on options and futures, but in reality, it does not make sense for retail traders to buy expensive options, even for the most bullish ones
There is really no way to know why these investors are so immensely optimistic, even though it could be an upward call spread.
In this scenario, the investor would buy the most expensive $25,000 call option while selling the $50,000 call option. This scenario makes more sense because it reduces current expenses from $1,750 to $750, while still allowing the investor to benefit massively from a potential price increase.
Profit/loss for the Bull call difference. Source: Optioncreator.com
The chart above illustrates the return on such a bullish call spread transaction. Although still very optimistic, this strategy offers positive returns for levels above $25,750.
A previous bet of $50,000 in 2018 did not pay off
In December 2017, Blocktower Capital paid $1 million for $50,000 of call options expiring in twelve months. At the end of 2018, Ari Paul, Blocktower’s CIO, explained that this was a volatile transaction as they simultaneously sold BTC and other assets
It is impossible to estimate the profit or loss on the transaction, but the $1 million premium has been permanently lost.
The views and opinions expressed herein are solely those of the author and do not necessarily reflect the views of Cointelegraph. All investments and business transactions involve risk. You must do your own research when making a decision.