There was a buyer of over 5000 BTC $50,00 calls expiring December 31, 2021. Buyer paid from $1,100 up to $1,200 per call option.
WHAT DOES THIS MEAN??
BTC is currently trading at $13,061. What are the actual chances BTC will close above $50,000 on Dec 31, 2021?
A professional analyst and mathematician can tell you his model’s estimation of the probability that BTC will be above $50,000 on December 31, 2021.
We can also ask a slightly different question: What are the chances BTC even touches $50,000 any time before Dec 31, 2021?
The chances BTC touches $50,000 are a little better than actually closing above $50,000 on the exact expiration date.
A pro options trader would ask: “What is the implied volatility (iv) of the call?”
First, he’ll input the known parameters into his pricing model and see that the iv of the call was close to 95%.
Then he can use one of many mathematical models, all with various assumptions of probability distributions (normal, lognormal, etc), to estimate an “implied probability” of the price expiring above the strike.
The buyer of these options most likely believes in his mind that the “actual probability” of BTC closing above $50,000 on Dec 31, 2021, is higher than what the mathematical model says based on the $1200 price.
If not, why else would he pay $1200 for the call option?
Maybe he does not believe that the “actual probability” is higher than the models, but he thinks he can make money on the trade or position in some other way.
Where does the price need to go for the buyer of these options to make money?
If the buyer can sell his options out in the market at any time before expiration day, he does not have to hold the options until they expire.
There are many potential ways to make money on this trade.
If the options are held through expiration, the BTC price would have to be $51,200 on December 31, 2021 to break even and come out of the trade with the initial entry amount of $1200. If the BTC price is under $50,000 at expiration, the calls are worth $0 and the initial entry amount is lost. If the BTC price is above $50,000 on expiration, let’s say $55,000, then the call option is worth $5,000 and his initial position of $1200 is now worth $5,000, for a gain or profit of $3,800.
There are many instances at times during the 14 months between now and Dec 31, 2021 that these options could be worth more than $1200, and quite significantly more. Here’s an example: BTC rallies sharply and closes this year out at $22,000. With price at $22,000 the excitement around Bitcoin has never been more electric and there is more confidence and hype about BTC going parabolic. In this case, people are now buying the $50,000 calls for $10,000 with a full year until expiration. The market is now implying a much higher probability that BTC might close above $50,000 on December 31, 2021. If he chooses, the buyer can sell his call for $10,000, for a gain or profit of $8800, or close to an 800% return.
The buyer DOES NOT necessarily think BTC will be $50,000 on December 31, 2021. He DOES think that buying and holding these calls is going to either:
a) be profitable by itself at some point between now and expiration…
b) he values the “optionality” of owning the position as it will allow him to more aggressively take advantage of additional trading opportunities that might arise between now and expiration.
👉 This helps generate greater returns and manage risk.
You never know – maybe he is just a chad calling his shot. It’s always fun to call your shot.
$50,000 BTC at the end of 2021. That would be fun. #SendIt
BIG BTC TRADE!
Yesterday there was a buyer of over 5000 BTC $50,000 calls expiring December 31, 2021.
Buyer paid from $1,100 up to $1,200 per call option.
WHAT DOES THIS MEAN??
Time for a thread 👇👇👇
— Rob Levy (@robbylevy) October 22, 2020