Buy rumors, sell news? $ 10K Ethereum options are 88% below their maximum price

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This year’s 500% cumulative gain drove the price of Ether (ETH) to an all-time high of $ 4,380 on May 12, and that rally was even more robust than the move in late 2017. The famous bull market or the bubble, whichever way You see, on a 390% rally, it propelled the price of Ether from $ 290 in November 2017 to $ 1,420 in mid-January 2018.

Perhaps this year’s mega-rally was a DeFi and NFT bubble that will take another two years to peak again, but it seems premature to forecast now. However, some analysts, including Celsius Network CEO Alex Mashinsky, argue that Ethers “flip” has already occurred when comparing the breadth of assets under management.

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According to Mashinsky, the main use case of Ether Yield Farming is the practice of staking out or locking crypto for rewards, while Bitcoin is mainly used as a store of value.

The expectation of increased scaling is another reason why Ether investors remain bullish even though the current price is 47% below its all-time high. Additionally, on July 1, global accounting giant Ernst & Young released the third iteration of its zero-knowledge-proof Ethereum scaling solution called Nightfall 3.

Nightfall 3 uses zk rollups, a Layer 2 scalability that consists of stacked transfers “rolled” into a transaction to improve transaction efficiency and privacy on the Ethereum network. According to the study, this is likely to result in a 90% reduction in gas charges.

Option price premium can reduce daily reduce

Regardless of how optimistic Ether investors are, the closer an options contract gets to its expiration date, the lower the premium will be. This effect means that the probability that a target price will be achieved drops significantly in a few days.

Ether $ 10,000 call option for December 31st at Deribit in ETH. Source: Deribit

The graph above shows Ethers’ end-of-year $ 10,000 call (buy) option, which peaked at 0.177 ETH on May 14th. At this point, Ether was trading at $ 4,150, so each option was priced at $ 734.

Remember, this option will be worthless if Ether trades below $ 10,000 at 8:00 AM UTC on December 31st. Even if the price hits $ 9,950, the option buyer would have wasted their $ 734 upfront. Hence, an uptrend of 160% was required for such call option holders to become profitable.

Not every $ 10,000 options trader is ruthless

Cointelegraph previously explained how professional traders use call options in strategies with multiple expiration dates, so the $ 10,000 ether option trades should not be interpreted as mere speculative bullish bets.

Connected: Because of this, professional traders expect the Ethereum price to drop further

For traders looking to take advantage of market distortions, selling the $ 10,000 call option is an excellent way for holders to get some return and the required initial margin is around 10% which allows for some leverage.

For example, if you bought the $ 6,000 Ether Call Options contract for December 31st, you could deposit 0.20 Ether and sell 1 contract to potentially receive the 0.073 ETH premium.

This generates a return of 36.5% in 6 months, which corresponds to an APY of 86%. If, however, no substantial margin amount is deposited, the seller of a call option runs the risk of being liquidated if the ether price rises.

The same exact trade will offer much higher returns during bullish markets as the premium on call options tends to increase.

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