Ethereum price drop deprived a trader of $ 3 million in options

One of the participants in the options market decided to make money by betting that the ether price would not experience a major decline by the end of this year, but did not guess right. On Tuesday, the cryptocurrency fell to a three-month low of around $ 1,700, forcing the trader to hastily fix losses. Writes about this CoinDesk.

 

“The market has moved just enough to force the trader to lock in a loss by repurchasing the 5,000 December expiration $ 2,560 strike options that he sold earlier this quarter,” said Greg Magadini, CEO of Genesis Volatility, an options analysis platform. “It looks like he suffered more than $ 3 million in losses.”

 

A put option gives its holder the right to sell the underlying asset at a specified price on a specified date in the future. The holder of the option earns on the fall in the rate below the strike or strike price, thus taking a short position. The seller, in turn, is interested in that such a decline does not occur.

The trader was likely selling $ 2,560 puts during the rally, hoping that the trend would continue at least until the end of the year, which would cause the option price to fall gradually. Ether, however, peaked above $ 4,000 on May 12, from where it more than doubled in price. At the same time, the likelihood of a profitable exercise of the option for the buyer has increased dramatically, due to which the price of the contract has also increased.

The transactions took place on the largest cryptocurrency options exchange Deribit. The number of open positions on $ 2,560 puts with expiration on December 31 increased 10-fold to more than 12,000 contracts in four weeks by May 12, and on Tuesday decreased by 5,000.

The rise and fall of open interest since March Image: Genesis Volatility

The available data does not allow us to find out at what price the trader sold the contracts. Magadini proposes to build on the average option price of $ 447 from mid-April to mid-May. It is possible that the trader was selling options in small batches throughout this time as the price of ether increased.

Thus, he had to collect $ 2.235 million in premiums paid to him by buyers for the conclusion of 5,000 contracts at an average price of $ 447. On Tuesday, the contracts were bought by him at a much higher price of $ 1,080, or only $ 5.44 million. The difference was more than $ 3 million and became a loss for the seller. He probably chose to close the deal, fearing that the ether will continue to fall. As it turned out, he was already buying out contracts at daily lows.

Open Interest Falls Tuesday Image: Genesis Volatility

Magadini notes that the closing of the deal took place on Deribit, and not through an OTC platform, as institutional players usually do. In this regard, he considers what happened to be a classic example of a retail investor’s mistake. This case also shows that selling options, whether puts or calls, is better suited to institutional investors who have adequate capital and are able to handle high risks.

There is a possibility that this sell could have been part of a bullish put spread or other complex strategy. A bullish put spread involves selling a put with a higher strike and buying a lower one. The benefit in such a situation is derived from the consolidation or growth of the market. In this case, losses are limited due to the acquired put. This is a fairly safe way to make money in a growing market compared to selling an uncovered put. However, there is no evidence that the sale of the put in this case was accompanied by the purchase of a contract with a lower strike. If this were the case, the trader would close the second half of the contracts, which would lead to a sharp decline in open interest.

 

“We have not seen any other options close apart from the $ 2,560 December expiration puts,” Magadini said.

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