A call spread is a simple option spread strategy when an equal number of call options are bought and sold at the same time. Ex: buy 1 call close to the ATM strike and sell 1 call further up the strike ladder.
As we continue to see bullish sentiment in Q4 of 2021, many people predict the price of BTC will go up through the end of the year, much like it did last year. If you hold this thesis, you might use the call spread options strategy.
You can see the call spreads being put on over the last few days from the previous week. If you look at the graph below you can see the 70k strike being bought and the 120k call strike being sold. Some of this volume is most likely the same entity putting on a spread.
To use the strikes in the chart above it would look something like this.
- ATM strike 62k BTC
- Buy the 70k call
- Sell the 120k call
As BTC price passes the long call (70k), it starts gaining in value. Up until the point when it passes your short call (120k), at this point your short call offsets any gain your long call makes and locks your max profit in.
Your max profit is capped at the difference between your long call and your short call minus the net premium you paid for this spread. In this case its 50k minus our overall premium of $6,342.
If BTC goes over 120k we make a total of $43,658. If BTC ends at 80k we still make the difference (80k-70k = 10k) minus the premium which would be $3,658.
If our call spread expires and BTC is trading below 70k, both calls expire worthless and we lose our premium, $6,342.
Why would you do this instead of just buying a call?
It’s true you could just buy a single call, but it would cost you about $1,300 more. If you wanted to make money on this trade, BTC would have to be trading over $57,631 at time of expiry.
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