LedgerX has just launched one of their first long term options contract which expires on December 28, 2018. This contract is being termed the Long-Term Equity Anticipation Security (LEAPS).
Unlike futures contracts where the buyer / seller is obligated to complete the transaction at the specified time, an option has no obligation. In this case, the buyer has the right to buy Bitcoin at $10,000 (Strike Price) on the 28th of December 2018 (Expiry time).
The really interesting part of the LEAP contract is the fact that the strike price is already at such a premium. CALL option holders can only make a profit on their investment is the price is above the strike on expiry. This means that the holders are really bullish that the price of Bitcoin is likely to be above $10,000 in a years’ time.
Positive For Adoption
This is seen as a positive move for the adoption of Bitcoin by large institutional investors. Options are helpful instruments as they provide the holder with an “asymmetric” payoff profile. They will allow investors to hedge their exposure to the actual price of Bitcoin.
For example, an investor with a portfolio that is heavy in Bitcoin can purchase a PUT option on the future price of Bitcoin. This enables the holder the right to sell the security at some predefined time in the future.
This is something that Paul Chou also expressed in an interview with CoinDesk. He said that it was a great sign that the crytpocurrency markets were indeed becoming secure. He went on by saying:
There will be, I expect, a lot more trades down the line. This is the first one, but it at least gives you the first guess from different institutional traders as to what bitcoin’s dynamics will look like from now until 2018.
There has already been interest for the contract despite a launch being only on Friday. Two investors decided to purchase the contract after the announcements by Chou.
The premium (cost) of these options was $2,250.25. This will mean that the buyer will only have an option that is “in the money” if the price of Bitcoin exceeds $12,250 in 2018. This is calculated as the profit from the trade less the premium spent on buying the option.
The reason that an option contract from LedgerX has an “asymmetric” payoff is because the most that the trader will lose is the premium. If the price of Bitcoin were to drop off a cliff, the holder is not obligated to buy it at the price.
Given the price fundamentals in the market, LedgerX was able to use a well-known option pricing model to calculate the probability of the price reaching this level. In this case the probability of Bitcoin reaching $10,000 on the 18 December 2018 is about 25%.
LedgerX Picks up Steam
The rollout of the LEAPs contract is bound to add much more volume to the already impressive record of LedgerX. The company only launched about 1 month ago but is already seeing high trade volumes.
For example, in the first week of trading, LedgerX was able to generate at least $1m of volume in the contracts. Indeed, further impetus was given when LedgerX was granted a derivative clearing organisation status by the CFTC. The result has been several days when the trading volume was able to exceed $1m.
In terms of total trading volume in LedgerX contracts, Chou estimates that they were able to approximately $16m in total volume to date. This is no doubt impressive given it only recently ran its soft launch.
It would be interesting to see what impact the entrance of larger institutions could have on LedgerX’s bottom line. The Chicago Mercantile Exchange (CME) recently announced that they would be offering Bitcoin futures on their exchange.
However, these will be Bitcoin futures at first which are not asymmetric instruments. Hence, LedgerX will still remain as one of the favoured options for Bitcoin options. As Bitcoin markets are as volatile as ever and institutions are in dire need of hedging instruments, the LEAPS contracts are one of the best options at the moment.
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