Do $100K–$300K Bitcoin call options signal a bullish BTC price path?

The open interest in bitcoin (BTC) options on the 31st. December, ranging from $100,000 to $300,000, has grown to an impressive 6,700 contracts currently worth $385 million. These derivatives give the buyer the right to buy bitcoins at a fixed price, while the seller has to stick to that price.

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You might think this is a great way to take advantage of a long position, but it is expensive and usually quite high. For this right, the buyer pays an advance (premium) to the seller of the call option. For example, a $100,000 call option is currently trading at 0.164 BTC, a value of $9,480.

For this reason, options traders rarely buy these options alone. Derivatives with a longer duration therefore usually have multiple strike prices or calendar months.

blocks of bitcoin options. Source: Paradigm TV

The figure above shows the current exchanges organized by Paradigm, an investor-focused institutional OTC trading desk. In this transaction, a total of 37 BTC $100,000 and $140,000 calls were sold between two of their customers.

Unfortunately it is not possible to determine on which side the market maker stood, but given the risks it can be assumed that the client was aiming for a bullish position.

Modeling the distribution of the BTC calendar. Source: Derribit positioner

By selling a $140,000 call option and simultaneously buying a more expensive $100,000 call option, this customer paid $138,000 upfront. This amount is their maximum loss at December 31, 2013. December is $100,000.

The red line in the model above shows the net income at expiration, measured in BTC. At the same time, the green line shows the theoretical net profit at 30. June.

So this customer needs $65,600 or more in bitcoins on June 30 to recoup his investment. This is well below the $107,150 needed to break even if the buyer of this call spread strategy can hold out until the December expiration.

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That’s because the price of a $100,000 call option is higher than $140,000. While bitcoin’s rise to $65,600 is reasonable for the $100,000 option with six months to go, it is not for the $140,000 option.

Numerous strategies can be achieved by trading ultra wide calls, where the buyer does not have to wait for expiration to make a profit. So if bitcoin goes up 30% in a few months, it makes sense for the holder of the call spread to liquidate their position.

As the example above shows, if bitcoin reaches $75,000 in June, the buyer can make a profit of $23,000 by closing his position.

While it is exciting to see exchanges offering massive series in the range of $100,000 to $300,000, these numbers should not be considered accurate price estimates based on analysis.

Professional traders use these tools to execute bullish but controlled investment strategies.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Cointelegraph. Every investment and every stage of trading involves risk. You should do your own research before making a decision.

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