Imagine that you are a Bitcoin (BTC) Bull, confident prices will gather, but first foresees a withdrawal. Like many people, however, you are not skilled at perfect timing of such market entrances and feel that you may miss the optimal moment to load bullish exposure.
For dealers facing this common situation, a structured product known as a lookback call may offer a compelling solution.
A lookback call is an exotic option that gives the holder the right to buy the underlying asset at the lowest observed price in the so-called lookback period.
Instead of trying to select the exact bottom of the current BTC prize backwards from record highs, a trader may consider a three-month retreat with a month of toll period.
This means that the strike price is set to the lowest value in the first month and the call can be exercised at this level at any time before the option expires three months after the view period. So if the BTC price dropped to $ 100,000 in the first month before rising, for example, $ 140,000 within the following three months, the holder could demand the issuer sell BTC to $ 100,000.
The unique structure of the setting ensures that call buyer benefits from ensuring the perfect dip, maximizing their surplus potential by removing the need for precise market timing. It is in sharp contrast a traditional call option from a centralized exchange where dealers have to choose a fixed strike price, increasing the risk of a suboptimal post.
“The BTC site remains near its heights, but implied volatility has collapsed. This combination makes lookback options particularly attractive from a risk pay perspective,” Pulkit Goyal, head of trade at Orbit Markets, told Coindesk. “With implied volatility at such low levels, the Lookback feature offers perfect access to limited extra costs.”
Orbit Markets, an OTC desktop specializing in options and structured products, suggested a three-month lookback call to its clients, which will set the strike at the lowest Bitcoin price over the next four weeks. The proposal emphasizes a growing demand for sophisticated risk management tools and highlights the rising maturity of the Crypto derivatives market.
The advantage of perfect entry comes towards an extra fee. Orbit’s Lookback Call is priced at 12.75% premium, making it 3.5% more expensive than a regular 3-month ATM call that costs 9.25%. The issuer of the option assumes the risk of BTC may fall, forcing them to give you a more favorable strike price. As a buyer you pay extra the unique advantage.
What if BTC doesn’t fall?
It is perfectly possible that BTC will immediately rise from the ongoing market rate of about $ 115,000 and will remain higher over the next four weeks before gathering further to $ 140,000 by the end of the following three months.
In this case, the strike price is set at $ 115,000 after one month’s lookback period, giving the caller right to buy BTC for $ 115,000 on the outlet.
In other words, although the prices did not originally dipped, the call buyer still got a good entrance that benefits from the subsequent upward move.
Risk profile
The buyer of the Lookback Call setting loses the initial prize if BTC goes down to levels below the strike price set after one month.
Therefore, the risk profile is similar to it for a standard call option.
3:09 UTC: Corrects the costs associated with the lookback call and standard call mentioned in the ninth para.
