As of December 31, open interest in Bitcoin Options (BTC) between $ 100,000 and $ 300,000 has reached an impressive 6,700 contracts, currently valued at $ 385 million. These derivatives give the buyer the right to receive bitcoin at a fixed price, while the seller is required to respect the price.
Some might think this is a great way to take advantage of a long position, but it is expensive and usually very high. For this right, the buyer pays an advance payment (premium) to the seller of the call option. For example, a $ 100,000 call is currently trading at 0.164 BTC, which equates to $ 9,480.
Because of this, sellers rarely purchase these options themselves. Thus, derivatives of longer duration usually include multiple redemption rates or calendar months.
Bitcoin options block deals. Source: Telegram Channel Template
Demonstrated above is real-time trading conducted by Paradigm, an OTC arm focused on institutional investors. As part of this deal, 37 BTC were exchanged between buyers in December for $ 100,000 and $ 140,000.
Unfortunately, it is impossible to know which side the market maker was on, but given the risk, it can be assumed that the buyer was looking for a bullish position.
BTC calendar spread simulation. Source: Deribit Position Builder
By selling a $ 140,000 call and buying a $ 100,000 more expensive call, this customer paid a premium of $ 138,000. This amount represents the maximum loss on December 31 and is $ 100,000.
The red line in the simulation above shows the net maturity score measured in bitcoin units. Meanwhile, the green line shows theoretical net profit as of June 30th.
Therefore, this client needs the bitcoin to trade at $ 65,600 or higher on June 30th to recoup the investment. That number is well below the $ 107,150 required to enter the market, although the buyer will continue with the redirect strategy until the deadline in December.
This phenomenon is caused by an increase in the cost of the call by $ 100,000, more than $ 140,000. While raising the bitcoin price to $ 65,600 works well for the $ 100,000 option in six months, it isn’t much for the $ 140,000 option.
Countless strategies can be executed by trading extremely bullish buy options, even if the buyer does not have to wait for the expiration date to take profit. Thus, if Bitcoin rises 30% in two months, this call spread carrier will obviously nullify its position.
As shown in the example above, if Bitcoin hits $ 75,000 in June, the buyer can make a net profit of $ 23,000 by closing the position.
While it is gratifying to see the stock markets show significant changes in the $ 100,000 to $ 300,000 range, these numbers should not be interpreted as accurate price estimates backed by analysis.
Professional traders use these tools to create bullish but manageable investment strategies.