Just as with options that use dollars as collateral, it is useful for traders to know where their cryptocurrency options will break even. It’s important to be aware of the difference in how this is calculated for cryptocurrency options to avoid any unwanted profit or loss surprises.
For call options that use dollars as collateral, you may remember that the breakeven point is simply:
Call Option Breakeven = Strike Price + Premium Paid
For cryptocurrency call options though, we need to use the following formula:
Cryptocurrency Call Option Breakeven = Strike Price / (1 – Premium)
And this time it is the premium amount in bitcoin (per contract) that we use in the calculation, not the dollar value.
Breakeven for buyers and sellers
Before we look at some examples, it’s worth mentioning that as with the dollar options, the breakeven point for cryptocurrency options is the same for the buyer and seller.
Example 1
Let’s first use the option from example 1 in the previous lecture. This was a bitcoin call option with a strike price of $12,000, and a premium of 0.05 BTC.
The breakeven is calculated as:
Breakeven = Strike Price / (1 – Premium)
Breakeven = 12000 / (1 – 0.05)
Breakeven = $12,631.58
This means if the bitcoin price is $12,631.58 when the option expires, the trade will have broken even, leaving your bitcoin balance the same as it was before the trade.
Example 2
Suppose we purchase a bitcoin call option with a strike price of $11,000, and we pay a premium of 0.11 BTC for it.
The breakeven is calculated as:
Breakeven = Strike Price / (1 – Premium)
Breakeven = 11000 / (1 – 0.11)
Breakeven = $12,359.55
This means if the bitcoin price is $12,359.55 when the option expires, the trade will have broken even, leaving your bitcoin balance the same as it was before the trade. As we are long this option, any bitcoin price below this will result in a loss, and any bitcoin price above this will result in a profit.
Example 3
Suppose we sell a bitcoin call option with a strike price of $16,000, and we collect a premium of 0.08 BTC for it.
The breakeven is calculated as:
Breakeven = Strike Price / (1 – Premium)
Breakeven = 16000 /( 1 – 0.08)
Breakeven = $17,391.30
This means if the bitcoin price is $17,391.30 when the option expires, the trade will have broken even, leaving your bitcoin balance the same as it was before the trade. As we are short this option, any bitcoin price below this will result in a profit, and any bitcoin price above this will result in a loss.
Premium and its effect on the breakeven point
The higher the option premium, the further away from the strike price the breakeven price will be. High option premiums favour the option seller then, as the price needs to move further before the seller will start making a loss. The option buyer on the other hand will of course benefit from lower option premiums, because the price will then need to move a smaller distance before they start to make a profit.
In summary
The breakeven point for cryptocurrency call options is not calculated in the same way as for dollar options. For this reason it’s important not to confuse the two calculation methods.
Remember to use the bitcoin premium of the option, rather than the dollar equivalent. It is also the per contract amount that should be used, regardless of the actual position size.
The larger the premium of the option, the further away from the strike price the breakeven price will be.