In the Bitcoin (BTC) options market, call (buy) open positions ranging from $ 100,000 to $ 300,000 reached 6,700 contracts worth $ 385 million.
These derivative contracts offer the buyer the right to buy Bitcoin at a fixed price, while the seller is obliged to trade at the said price.
Ek okuma: What is a Bitcoin option? How do options contracts work?
Seen as an effective way to take long positions, these options seem profitable, but often require quite a premium to be paid. The buyer pays an advance fee (premium) to the call option seller. For example, for the $ 100,000 call option, 0.164 BTC, equivalent to $ 9.480, must be paid at the moment.
The institutional investor-oriented over-the-counter dealing desk shown above is a real transaction organized by Paradigm. In this trade, between the two clients, a total of $ 100,000 and $ 140,000 were traded for a total of 37 BTC as of December.
You may be interested in: What is Bitcoin futures? How to invest in futures?
Unfortunately, there is no way of knowing which side the market maker is on, but given the associated risks, it can be assumed that the client takes a position expecting a rise.
Having sold the $ 140,000 call option and bought the more expensive $ 100,000 call option, this customer had to pay $ 138,000 in advance premium. This amount represents the maximum loss at $ 100,000 on December 31st.
The red line in the simulation above shows the net result at maturity, measured in BTC. The green line indicates the theoretical net return on June 30th.
Therefore, this client needs to trade at $ 65,600 or higher on June 30 to compensate for his investment. This price is significantly lower than the anticipated $ 107,150, even if the buyer holds the contract until the end of December.
This is due to the $ 100,000 call option price value being higher than $ 140,000. While the Bitcoin price increase to $ 65,600 is quite appropriate for a $ 100,000 option six months before the contract expires, not so much for the $ 140,000 option.
You may be interested in: What is a cryptocurrency derivative product? How is the derivative done?
The buyer does not have to wait for the expiry date to receive profit. If a strong bull market is seen, he may sell call options. Therefore, if Bitcoin rises by 30 percent within a few months, it makes sense for the holder of this call option to sell his contract.
As shown in the example above, if Bitcoin reaches $ 75,000 in June, it can make $ 23,000 net profit by closing the buyer position.
While it is exciting to see the exchanges offering huge $ 100,000 to $ 300,000 expiry offers, these amounts should not be treated as price estimates based on precise analysis.
Professional traders use these instruments to implement controlled strategy during the uptrend.
The opinions and comments expressed here are only to the author belongs. It may not reflect Cointelegraph’s views. Every investment and trading transaction involves risk. When making your decision, you should do your own research.