Buy the rumor, sell the news? $10K Ethereum options are 88% down from their peak price

$10,000 Ethereum options for December 2021 cost buyers $734 each, but today they are only worth $85 and ETH price is 47% away from its all-time high.

This year’s 500% accumulated gain took Ether’s (ETH) price to a $4,380 all-time high on May 12, and this rally was even more robust than the late-2017 move. The famous bull market, or bubble, depending on how you see it, took Ether’s price on a 390% rally from $290 in November 2017 to $1,420 in mid-January 2018. 

Maybe this year’s mega rally was a DeFi and NFT bubble that will take another two years to reclaim its peak, but it seems premature to make a prediction now. However, some analysts, including Celsius Network CEO Alex Mashinsky, argue that Ether’s “flippening” has already happened when comparing the breadth of assets under management.

According to Mashinsky, Ether’s primary use case is yield farming, the practice of staking or locking up crypto in return for rewards, while Bitcoin is mostly used as a store of value.

The expectation of increased scaling is another reason that leads Ether investors to remain bullish despite the current price being 47% below its all-time high. Furthermore, on July 1, global auditing giant Ernst & Young released the third iteration of its zero-knowledge proof Ethereum scaling solution called Nightfall 3.

Nightfall 3 uses zk-Rollups, a layer-two scalability consisting of batched transfers ‘rolled’ into one transaction, to improve transaction efficiency and privacy on the Ethereum network. According to the study, it will likely result in a 90% gas fee reduction.

Options price premium can reduce daily

Regardless of how bullish Ether investors are, the closer an options contract comes to the expiry date, the smaller the premium becomes. This effect means that the fewer days to reach a target price significantly reduces its odds.

The above chart shows Ether’s $10,000 call (buy) option for year-end, peaking at 0.177 ETH on May 14. At that time, Ether was trading at $4,150, so each option was priced at $734.

Keep in mind that this option will be worthless if Ether trades below $10,000 on Dec. 31 at 8:00 am UTC. Even if the price reaches $9,950, the option buyer would have wasted his $734 upfront. Therefore, a 160% upside was needed for such call option holders to become profitable.

Not every $10,000 option trader is reckless

Cointelegraph previously explained how professional traders use call options in strategies involving multiple expiry dates, so the $10,000 Ether option trades should not be interpreted as merely speculative bullish bets.

Related: Here’s why pro traders expect further downside from Ethereum price

For traders looking to profit from market distortions, selling the $10,000 call option is an excellent way for holders to generate some yield, plus the initial margin required is roughly 10%, which allows some leverage.

For example, if one bought the $6,000 Ether call option contract for Dec. 31 they could deposit 0.20 Ether and sell 1 contract to potentially collect the 0.073 ETH premium.

This generates a 36.5% return in 6 months, which is equivalent to an 86% APY. However, unless a substantial margin amount is deposited, the seller of a call option runs the risk of being liquidated if Ether price hikes.

The same exact trade will offer much higher returns during bullish markets because the call options premium tends to increase.

The views and opinions expressed here are solely those of the author and do not necessarily reflect the views of Cointelegraph. Every investment and trading move involves risk. You should conduct your own research when making a decision.