In the last three weeks, $150,000 of Bitcoin Call Options (BTC) of $50,000 have been traded for the June and December 2021 target price. The derivatives exchange, LedgerX, has been brokering these ultra-rising trades, but what could be the reason behind them?
There are some good reasons to buy options with such small odds, but it doesn’t seem very reasonable to pay $1,000 for the privilege of buying in 18 months Bitcoin 440% above the current price.
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Even considering an annual volatility of 100%, which is quite high even by Bitcoin standards, the probability of the price reaching USD 50,000 is less than 8%.
The seller of the call option takes a risk
The seller of this call option has an unlimited disadvantage if the price for any reason or circumstance exceeds the level of USD 51,000 and for this commitment the seller is paid USD 1,000 in advance.
By way of comparison, the December 2021 call option is priced at USD 25,000 and quoted to be sold at USD 1,750. Such a buyer will get USD 13,250 if the Bitcoin price reaches USD 40,000, which is a healthy 650% return.
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On the other hand, the buyer of the USD 50,000 option would gain nothing from this massive run at USD 40,000.
Possible justification for such a bullish trade
Recently, all the crypto space has been focused intensely on options and futures instruments, but in reality, it does not make sense for retail traders to buy such expensive options, even for the most optimistic.
There is really no way to know what drives these immensely optimistic investors, although this could be a bullish buying spread.
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In this scenario, the investor would be buying the more expensive call option of USD 25,000, while selling his call option of USD 50,000. This makes more sense since it reduces the current expense to USD 750 instead of USD 1,750 along with the benefit of massive profits from a potential upward run.
The chart above shows the spread performance in the bullish buy trade. Although still very optimistic, this strategy provides positive returns for levels above USD 25,750.