Bullish $10K Ethereum call options excite traders but there’s a catch

The $ 10,000 Ether (ETH) call options were recently highlighted on December 31 after surpassing $ 15.2 million in open interest (8,400 contracts). These tools give the buyer the right to obtain Ether at a future date at a fixed price and the seller is obligated to respect it.

For this right, the buyer pays an upfront fee (premium) to the seller of the call option. For this reason, buy options are considered neutral to bullish as they give the buyer the possibility of high leverage with little upfront investment. This “right” is currently trading for $ 263, equivalent to 14% of the December 31st Ethereum base futures price.

Buying just $ 10,000 ETH call options can be considered a risky bet, or as WallStreetBets Reddit users call it, the “YOLO” trade. The problem is that longer expiry options usually include multiple execution prices or calendar months.

For example, on January 10, a spread deal involving 1,500 ETH call options took place on September 24 with a $ 8,000 strike and 1,500 calls on December 31 with a $ 10,000 strike.

Paradigm, the institution-focused OTC office, brokered this “calendar spread” strategy, and trades on the Deribit exchange. Unfortunately, there is no way to know which side the market maker was, but given the risks involved, one must assume that the client was looking for a bullish position.

Simulation of spread ETH calendar. Source: Deribit Position Builder

By selling the call option for the month of September and the simultaneous buying of the most expensive December call, this customer paid a premium of $ 80,000 up front, which is his maximum loss. According to the simulation above, this customer needs Ether at $ 3,100 or higher to recoup their investment.

Despite shooting the stars with a potential net gain of $ 2.45 million when $ 8,000 expires, this same customer would lose more than $ 300,000 if Ether hits $ 14,000 on September 24.

Countless strategies can be accomplished by trading extremely bullish call options, although the buyer does not need to wait for the expiration date to take profit. Thus, if there is a 30% increase in Ether within two weeks, it makes sense that this “calendar difference” holder would cancel their position.

Simulation of spread ETH calendar. Source: Deribit Position Builder

As shown in the example above, if the price of the September Ether futures contract increases by 25% in thirty days, the buyer can make a net profit of more than $ 60,000 by closing the position.

This effect occurs because the December long-term purchase of $ 10,000 would increase further than the $ 8,000 September option. Assuming that buyers of $ 10,000 call options are effectively anticipating these rates is naive.

While it is exciting to see exchanges advance $ 10,000 to $ 100,000 in 2021, these numbers should not be taken as real price estimates backed by analysis. Do professional traders use these tools to make bullish investment strategies?


But they’re not very speculative deals.

The opinions and opinions expressed herein are solely of those of The authors They do not necessarily reflect the views of Cointelegraph. Every investment and trading movement involves risks. You must do your own research when making the decision.