The most basic bitcoin (BTC) option contracts involve the purchase of a call that gives the holder the opportunity to acquire the asset at a fixed price on a specified date. For this privilege, the buyer simply pays the seller a contract in advance a fee, known as a premium.
While it’s a great way to leverage and avoid the liquidation risk of trading futures contracts, it’s worth the price. The option premium will rise during volatile markets, which will cause the trade to require further price appreciation in order to make a reasonable profit, so the premium is a metric that investors must closely monitor.
The daily volatility of bitcoins is currently 5.4%, which is much more than 1.7% of the S&P 500. This creates opportunities for arbitration tables that will be happy to keep bitcoins in custody and sell the option to take over this premium.
Let’s look at a hypothetical trade, what role premiums play in the scenario.
The chances of this trade are calculated according to the Black & Scholes model and the Deribit exchange presents this information as a “delta”. In short, these are the percentage odds for each strike.
According to the chart above, a strike of $ 54,000 on March 26 has a 48% probability that it will occur according to the option pricing model, which sounds reasonable. On the other hand, a call option of $ 58,000 has an implicit probability of 37%.
There are about 20 days left until the end of March 2021, and given today’s price action, the probability of closing a bitcoin price above $ 60,000 seems likely. Because this calling option trades at 0.0548 BTC, it costs $ 2,790 when bitcoins traded at $ 50,900.
For this calling option to be profitable, the price of BTC must be $ 60,800. If this buyer opted for a conservative 3x leverage futures trade, the price of bitcoin at $ 60,800 would yield a profit of $ 1,485.
Option markets are a great way to take advantage, but investors must take the time to carefully analyze returns before buying bullish calls.
The views and opinions expressed herein are those of an opinion author and does not necessarily reflect the views of the Cointelegraph. Every investment and business move involves risk. You should do your own research when making your decision.