The base Bitcoin (BTC) options contracts involve purchasing a call, which gives the holder the ability to purchase an asset at a fixed price on a specified date. To obtain this privilege, the buyer only pays a fee provided to the seller under the contract, known as a premium.
While this is a great way to use leverage while avoiding the liquidation risks associated with futures trading, it does come with a price. The option premium will rise during volatile markets, which means that a trade requires additional price increases in order to make a reasonable profit, so the premium is a measure an investor should pay attention to.
Bitcoin’s daily volatility is currently at 5.4%, which is well above the S&P 500 at 1.7%. This creates opportunities for arbitrage bureaus that want to hold the bitcoin and sell a put option to claim the prize.
Let’s take a look at a hypothetical deal and how the prize plays a role in the scenario.
The odds for this trade are calculated according to Black and Scholes’ model, and Deribit presents this information as delta. In short, these are the percentages for each outcome.
As per the chart above, a strike of $ 54,000 on March 26th has a 48% chance of occurring under the options pricing model, which seems reasonable. On the other hand, the implied probability of a $ 58,000 call is 37%.
With around 20 days remaining until the end of March 2021, it appears that the likelihood of Bitcoin’s price closing is higher than $ 60K per month given today’s price action. Given that this call option is trading at 0.0548 BTC each, it is worth $ 2,790 and Bitcoin is trading at $ 50900.
For this call to be profitable, the price of BTC should be $ 60,800. If this buyer had chosen a conservative futures position with 3x leverage, the bitcoin price of $ 60,800 would have made a profit of $ 1,485.
The options markets are a great way to take advantage, but investors need to take the time to carefully analyze the performance before purchasing bullish calls.