How One Bitcoin Options Trader Turned $638K Into $4.4M in 5 Weeks

57


In the run-up to the 2017 market peak, stories abounded of traders who bought bitcoin in the spot market just a few months before only to cash out to the tune of hundreds of thousands, if not millions, of dollars.

The days of tripling or quadrupling your money in just a week or two just by buying bitcoin may be behind us. But since those heady days of three years ago, the crypto derivatives market has taken up the mantle of being the place where astonishing returns can occasionally be had by taking huge risks. 

Indeed, some traders with bullish outlooks have recently generated significant profits by taking long positions using the cheap out-of-the-money call options. That has given them the same reward as holding multiple bitcoins in the spot market but at a significantly less cost, albeit with more risk.

That’s what a bullish call options trade executed five weeks ago on the world’s largest crypto options exchange, Deribit, has achieved.

On Oct. 30, someone (a single trader or small group) bought 16,000 January expiry call options at the $36,000 strike for 0.003 bitcoin per contract, according to data shared by Deribit. The total cost was 48 bitcoin – the number of contracts (16,000) multiplied by the per-contract premium of 0.003 bitcoin.

Bitcoin options trade on Oct. 30
Source: Deribit

photo_2020-12-07-20-43-14

Bitcoin options trade on Oct. 30
Source: Deribit

In dollar terms, the per-contract premium at the time was around $39.90, and the entire trade required an initial outlay of approximately $638,400.

As bitcoin rallied from $13,400 to over $19,000, the premium drawn by the $36,000-strike January expiry call rose from 0.003 bitcoin to 0.0145 bitcoin, generating a paper profit of more than $4 million. 

Here is how the net return is calculated:

= [(Option’s current price of 0.0145 BTC x 16,000 contracts) x bitcoin’s current spot market price of $19,200] minus (-) cost of trade.

= [232 bitcoin x $19,200] – $638,400

= $4,454,400 – $638,400

= $3,816,000

If the position were to be liquidated now, and assuming dumping on the market 16,000 far-out-of-the-money calls wouldn’t drop the price, the net return ignoring the fees charged by the exchange would be seven times the initial outlay. 

A call option gives the holder the right but not the obligation to buy the underlying asset at a predetermined price on or before a particular date. A put option represents a right to sell. Options on Deribit are also cash-settled, which means when they are exercised it is only the profits that are paid. One options contract represents the right to buy or sell one bitcoin. 

As of now, the $36,000 call is an out-of-the-money call option – one which has no intrinsic value due to the spot price hovering below the strike price. 

Theoretically, the purchase of the $36,000 call expiring on Jan. 29 is a bet that prices will rise above $36,000 before the end of January, making the option “in-the-money.” 

The crypto derivatives market has taken up the mantle of being the place where astonishing returns can occasionally be had by taking huge risks.

Source link