Ether (ETH) ‘s $ 10,000 call options on December 31st were recently in the spotlight after exceeding $ 15.2 million in open positions (8,400 contracts). These instruments give the buyer the right to purchase Ether at a later date at a fixed price, and the seller is obliged to comply with this price.
The buyer pays an advance payment (premium) to the call option seller for this right. For this reason, call options are considered neutral to bullish, as they offer the buyer the possibility of high leverage with a small upfront investment. This “right” is currently trading for USD 263, which is 14% of the underlying ETH futures price as of December 31st.
Just buying the $ 10,000 worth of ETH call options can be considered a risky bet or, as WallStreetBets Reddit users call it, a “YOLO” trade. The problem is that options with a longer expiration usually involve multiple exercise prices or calendar months.
For example, a spread trade took place on January 10th that included 1,500 call option contracts from ETH for September 24th with a $ 8,000 strike and 1,500 calls for December 31st with a $ 10,000 strike.
Paradigm, an institutionally focused OTC desk, brokered this “calendar spread” strategy, and the dealings took place on the Deribit exchange. Unfortunately, there is no way of knowing which page the market maker was on. However, given the risks involved, it should be assumed that the client was looking for an optimistic position.
By selling the September call option and buying the more expensive December call at the same time, this customer paid an estimated premium of $ 80,000 upfront. This amount corresponds to the maximum loss. According to the simulation above, this customer would need $ 3,100 or more ether to recoup their investment.
Despite shooting for the stars with a potential net profit of $ 2.45 million on expiry of $ 8,000, the same customer would lose more than $ 300,000 if Ether happened to be at $ 14,000 on September 24th.
A myriad of strategies can be achieved by trading ultra-bullish call options, although the buyer does not have to wait for the expiration date to generate profits. If Ether is increasing 30% in a couple of weeks, it makes sense for that “calendar spread” holder to remove their position.
As shown in the example above, if the futures price of Ether in September increases by 25% in 30 days, by closing the position, the buyer could generate a net profit of over $ 60,000.
This effect occurs because the longer-term call option in December of $ 10,000 increases by more than $ 8,000 than the option in September. It is naive to assume that buyers of $ 10,000 call options would actually expect these prices.
While it’s exciting to see exchanges offering massive expiration times of $ 10,000 to $ 100,000 through 2021, these numbers should not be taken as authentic, analytical-backed price estimates. Do professional traders use these tools to conduct bullish investment strategies?
But they don’t make highly speculative trades.
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