Bitcoin and crypto- related securities have been the talk of the trading world for weeks as the value of these new digital currencies have skyrocketed. And with the value of the coins’ rise, there’s been massive moves in the share prices of companies that are involved.
For example, yesterday, Longfin (LFIN) rose more than 225% after the company bought another company that is a block chain-empowered solutions provider. LFIN closed at 22 on Friday and traded as high as 142 on Monday before closing the day at 72.
Some traders look at bitcoin and crypto and see the future, and others can’t short enough of it.
This morning, famed short selling firm Citron accused bitcoin-related company Riot Blockchain (RIOT) of fraud. RIOT, which has been a trading vehicle for bitcoin bulls, is described as “intending to gain exposure to the block chain ecosystem through targeted investments in the sector.” Here was Citron’s tweet: “$RIOT is THE most traded retail stock in market today yet Citron believes they are making fraudulent claims to investors.”
Shorting companies like LFIN and RIOT is NOT easy. In fact, it is almost impossible to short these shares. Because of that, traders have turned to the options world. However, it’s also not easy to short via puts.
For example, let’s take a look at RIOT, which is trading at 45 today, having traded at 8 just one month ago.
With the stock trading at 45, a trader might look to buy February 45 Puts, but those puts are out-of-this-world expensive. Here’s the market on the calls and puts for the RIOT February 45 strike:
7.00 8.50 RIOT Feb 16'18 45 18.20 21.50
The market on the calls (on the left) is 7.00 – 8.50.
The market on the puts (on the right) is 18.20 – 21.50.
Why are the puts so much more expensive than the calls? With the stock at that strike price, one would expect the price of the calls and the puts to be nearly identical.
To get to that answer, let’s first examine shorting stocks.
Short selling refers to a trader selling a security he doesn’t own with the intention of buying it back later at a cheaper price.
Since the trader doesn’t own the stock, he borrows it from a broker and short sells it. At a future date, he will buy it back and return it to his lender. However, the trader must pay a fee to the lender for the borrowed stock—this is known as the borrowing cost. And in the case of RIOT, those costs are EXORBITANT.
With the trader not wanting to pay the high costs, but still wanting to get bearish exposure, he might look to buy a put.
And when the bearish trader buys the put from the market maker, the market maker needs to short the stock as a hedge when he sells the put. (The market maker sells the put, which is bullish, so he must sell stock to offset his bullish option position.) This new stock sale puts the market maker in the same spot as above, having to sell the stock at huge cost. So the market maker makes the price of puts EXTREMELY expensive. If he is going to need to sell stock to hedge, he is going to make the put equally expensive. And in the case of RIOT, that’s why the put is so much more expensive than call.
How the bitcoin/crypto situation is going to play out is anyone’s guess. However, I know that many of you have interest in playing the hot game on the bullish and bearish side, so I wanted to show how the options market is affected.