Over the past three weeks, $150,000 worth of Bitcoin (BTC) $50K call options for June and December 2021 strikes have been traded. LedgerX derivatives exchange has been intermediating these ultra bullish trades, but what could be the rationale behind them?
There are some good reasons for buying options with such small odds, but paying $1,000 for the privilege of purchasing Bitcoin 440% above the current price in 18 months seems unreasonable.
Even considering an annual 100% volatility, which is quite high even for Bitcoin’s standards, the probability that the price will reach $50,000 is less than 8%.
The call option seller takes the risk
The seller of this call option has unlimited downside if price somehow manages to surpass the $51,000 level and for this commitment the seller is paid the $1,000 upfront.
For comparison, the December 2021 call option with a $25,000 strike has been trading at $1,750. Such a buyer will profit $13,250 if Bitcoin price reaches $40,000, which is a healthy 650% return.
On the other hand, the $50,000 strike buyer would gain nothing from this massive bull run to $40,000.
Potential rationale for such bullish trade
Recently, crypto media and crypto-Twitter have been intensely focused on options and futures instruments but in reality, it makes no sense for retail traders to buy pricey options, even for the most bullish ones.
There’s really no way to know the rationale that drives these immensely optimistic investors, although this could be a bull call spread.
In this scenario, the investor would be buying the more expensive $25,000 call option, while selling the $50,000 one. This makes more sense as it reduces the current expenditure to $750 from $1,750 along with the benefit of profiting massively from a potential bull run.
Profit/Loss for Bull Call Spread. Source: Optioncreator.com
The above chart depicts the return for such a bull call spread trade. Although it is still very optimistic, this strategy provides positive returns for levels above $25,750.
A previous $50K bet in 2018 did not pay off
Back in December 2017, Blocktower Capital paid $1 million for $50K call options maturing in twelve months. In late 2018, Blocktower CIO Ari Paul explained that it was a volatility trade carried out as they simultaneously sold BTC and other assets.
There’s no way to estimate the trade’s profit or loss, but the $1 million premium definitively has been lost.
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.