Nov. 22, 2017 (The Ferowich Report) — A federally regulated swap execution facility and derivatives clearing organization has announced the listing of long-term bitcoin call options at a strike price of $10,000.
Why it matters: The introduction of bitcoin derivatives, first at the Chicago Mercantile Exchange, and now at LedgerX, paves the way for massive cash infusions into bitcoin markets from institutional investors, financial institutions, and high-net worth individuals. Using bitcoin as an underlying asset for derivatives contracts drives bitcoin further into the mainstream.
The nitty gritty: Calls sold for $2,250.25 with an expiration date of Dec. 28, 2018. LedgerX’s platform relied on the Black-Scholes model to price the options contracts dubbed LEAPS, Long-Term Equity Anticipation Securities.
How LEAPS works: The owner of a call option can purchase bitcoin at a price of $10,000 at any time up until the expiration date. The $2,250.25 purchase simply secures the legal right to exercise the option.
Suppose Bitcoin is trading at $15,000. Someone who owns the LEAPS option has the right to buy bitcoin for $10,000 at that point in time, sell it at the higher price, and pocket the spread ($5,000).
Alternatively, if Dec. 28, 2017 hits and bitcoin is trading at $9,000, the options owner can simply let the option expire. The options owner would only be out the original price paid for the call, $2,250.25.
Long calls like LEAPS are attractive for providing known downside and unlimited upside potential.
Importantly, unlike futures contracts, the options owner has no legal obligation to deliver, i.e. purchase the underlying asset at the specified strike price on the expiration date
How to interpret it: The options price of $2,250.25 “implies a probability of approximately 25 percent that bitcoin will be above $10,000 by the end of next year,” writes Paul Chou, CEO and co-founder at LedgerX.
Are Ethereum and Ripple up next? “I want to give all credit for this milestone to our regulators and customers who have made it possible for such a dynamic new asset class. And we’re still just getting started,” Chou said.