Ether traders buy $4K calls in anticipation of record high

Catching a falling knife is risky, but some crypto options traders look to be doing just that, betting on a bullish outcome in a falling market.

Ethereum's native token Ether (ETH), the second-largest cryptocurrency by market value, has dropped over 5% to $3,350 in one week, according to CoinDesk data. The decline follows speculation that ether ETFs could begin trading in the U.S. next month and is consistent with weakness in market leader bitcoin and other alternative cryptocurrencies.

Still, according to Amberdata data, some traders have been buying large numbers of ether September expiry call options at the strike level of $4,000 on crypto exchange Deribit.

A call option is a derivative contract that gives the holder the right to buy the underlying asset at a specified price within a predetermined time frame. When traders purchase call options, they do so with the expectation that the price of the underlying asset will rise above the strike price, that is, $4,000 in this case, before the expiry of the option.

"Looking at the block flows this week, we see a ton of buying activity for the September $4,000 calls," Greg Magadini, director of derivatives at Amberdata, said, adding it is a sign of traders betting that "if ETH gets above $4k we likely test and breakout new all-time-highs."

Block trades are large orders typically negotiated privately between two parties and listed on an exchange. They are commonly preferred by institutional investors, hedge funds, and large market participants.

Ether, which came into existence in 2015, set a record price of over $4,800 since November 2021. While BTC surpassed its 2021 early this year, ether only briefly managed to top the $4,000 mark, with the upside relatively restricted due to regulatory uncertainty and low odds of ETH getting a spot ETF listing in the U.S.

Since then, the U.S. Securities and Exchange Commission (SEC) has set the stage for a spot ether ETF approval and dropped an investigation into Ethereum 2.0, removing significant regulatory uncertainty from the market. Now, Bloomberg's ETF analyst Eric Balchunas expects ether ETFs to begin trading in the U.S. on July 2.

Perhaps traders buying $4,000 calls expect fireworks once the ETFs go live. The bullish flow is consistent with the elevated volatility expectations in the ether market. However, some observers, including JPMorgan, aren't buying the excitement.