Paradigm

Derivatives exchanges now offer $100,000–$300,000 Bitcoin call options, but how keen are pro traders to take the bait?

The open interest on Bitcoin (BTC) Dec. 31 call options between $100,000 and $300,000 reached an impressive 6,700 contracts, which is currently worth $385 million. These derivatives give the buyer the right to acquire Bitcoin for a fixed price, while the seller is obliged to honor the price.

One might think that this is a great way to leverage a long position, but it comes at a cost and is usually quite high. For this right, the buyer pays an upfront fee (premium) to the call option seller. For example, the $100,000 call option is currently trading at 0.164 BTC, equivalent to $9,480.

For this reason, option traders seldomly buy these options by themselves. Therefore, longer-expiry derivatives usually involve multiple strike prices or calendar months.

Shown above is an actual trade arranged by Paradigm, an institutional investor-focused over-the-counter trading desk. In this trade, a total of 37 BTC December $100,000 and $140,000 calls have been traded between two of their clients.

Unfortunately, there's no way to know which side the market maker was, but considering the risks involved, one can assume the client was looking for a bullish position.

By selling the $140,000 call option and simultaneously buying the more expensive $100,000 call, this client paid a $138,000 upfront premium. This amount represents their max loss, which takes place at $100,000 price on Dec. 31.

The red line on the above simulation shows the net outcome at expiry, measured in BTC. Meanwhile, the green line displays the theoretical net return on June 30.

Thus, this client needs Bitcoin to trade at $65,600 or higher on June 30 to recoup their investment. This number is significantly lower than the $107,150 required for the break-even if this "call spread" strategy buyer holds until the December expiry.

This phenomenon is caused by the $100,000 call option price appreciation being larger than the $140,000. While a Bitcoin price increase to $65,600 is quite relevant for a $100,000 option with six months left, it is not so much for the $140,000 one.

Countless strategies can be achieved by trading ultra-bullish call options, although the buyer doesn't need to wait for the expiry date to lock in profits. Thus, if Bitcoin happens to increase by 30% in a couple of months, it makes sense for this call spread holder to unwind their position.

As shown in the example above, if Bitcoin reaches $75,000 in June, the buyer can lock in a $23,000 net profit by closing the position.

While it's exciting to see exchanges offering massive $100,000–$300,000 expiries, these figures should not be taken as precise analysis-backed price estimates.

Professional traders use these instruments to conduct bullish but controlled investment strategies.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.