With a return on investment of 9.118%, Bitcoin options trading initiated in late October outperforms some of the best bets in the currency market in the past 40 years.
On October 30th, someone (a single trader or a small group) bought 16,000 contracts with expiration options on January 29th on the strike of $ 36,000 for 0.003 bitcoin per contract. This emerges from data that Deribit announced. The initial investment or total purchase cost was 48 BTC, or roughly $ 638,400 per Bitcoin price at the time.
At press time, the $ 36,000 call option pulls a price of 0.1060 bitcoin on Deribit. At current prices that haven’t changed significantly in the past 24 hours, and assuming the position is still active, the trader appears to be sitting on a profit of 1,648 Bitcoin, or $ 58.2 million.
This is how we get to the net return:
= [(Option’s current price of 0.1060 BTC x 16,000 contracts) x bitcoin’s current spot market price of $34,700] minus (-) trading costs.
= [1,696 bitcoin x $34,700] – $ 638,400
= $ 58,851,200 – $ 638,400
= $ 58,212,800
That’s a return on investment of 9.118%. The trader would have made significantly less money on the spot market as Bitcoin is currently up over 150% from the October 30 average of around $ 13,700.
Trading in the context of other famous profits
The staggering four-digit return is far higher than what veteran trader George Soros reportedly earned in September 1992 when he slashed the British pound. As remembered in InvestopediaSoros took a short position worth $ 10 billion and made $ 1 billion as the pound fell 15% against the German mark and 25% against the US dollar.
There were, of course, others. The 86% return achieved by the dealer Louis Bacon In the 1990s, buying oil and selling stocks in anticipation of Iraq’s invasion of Kuwait also appears meager compared to the 9.118% gain from trading Bitcoin options. As such, one might be tempted to call Bitcoin options trading one of the most epic bets ever made. Traditional market veterans suggest otherwise, however.
“Interesting [trade], but difficult to really know about trading success … [W]The inning of a lottery ticket is also a great return on investment, ”Marc Chandler, chief marketing strategist at Bannockburn Global Forex, told CoinDesk in an email. Chandler has 30 years of experience in global capital markets and is the author of Understanding the Dollar.
Chandler’s lottery analogy makes sense since the $ 36,000 call in October was deep out of the money (spot rate trading well below the strike price) and trading at a marginal premium of 0.003 bitcoin.
When a trader buys options, be it a call or a put, the maximum loss is limited to the amount of the price (premium) originally paid and the maximum gain is unlimited. That’s because the sky is theoretically the limit on the price of an asset. Therefore, buying cheaper out-of-the-money options is like buying a lottery ticket.
This does not necessarily mean that the options trader was just playing with 48 BTC or $ 683,000 by taking a long position on the $ 36,000 call position in October.
The fact that the position remained well active after the cryptocurrency hit new record highs above the December 2017 high of $ 19,783 in mid-December suggests that the trader was expecting a meteoric surge. Amateur traders playing with deep OTM options usually take profits quickly.
“This trade can be added to the trading legends in the crypto room, like the guy who bought a pizza [with] Bitcoin back then, ”Chandler quipped.
Also, this trade cannot be compared to some of the best traditional market trades as the currency / commodity / stock markets are much larger than the entire cryptocurrency market in terms of market capitalization and trading volume.
“Despite all the excitement, I still see Bitcoin as a very niche, highly speculative and illiquid market. Even if the liquidity is better than before, I don’t see it as FX at all, ”said Marc Ostwald, chief economist at ADM Investor Services in London.
Profit posted on Tuesday?
Open interest, or the number of open positions in the $ 36,000 call that expired on January 29, fell by 9,500 to 5,000 on Tuesday.
According to some observers, the sharp decline is due to the settlement of the long trade in October. “This is probably from our whale friend who bought it back,” October-November, Switzerland-based data analysis platform Laevitas tweeted early Wednesday as he noted the decline in open interest.
Bitcoin hasn’t moved much in the past 24 hours. We can therefore assume that the trader achieved a return of around 9,000% on Tuesday.