Payments-focused cryptocurrency XRP has rallied sharply this month, outshining larger cryptocurrencies. Some traders are snapping up bullish bets in the options market in hopes of continued gains into the end of the year.
The cryptocurrency, ranked fifth by market value, traded at about 43 cents at press time, a 28% gain for the month, according to CoinDesk data. Market leaders bitcoin and ether were down 4.5% and 17%, respectively.
"We have seen interest in buying XRP year-end upside call options in anticipation of a resolution in the ongoing lawsuit with the U.S. Securities and Exchange Commission," Dick Lo, the founder and CEO of Hong Kong-based quant trading firm and liquidity provider TDX Strategies, said.
A call is a derivative contract giving the purchaser the right but not the obligation to buy the underlying asset – in this case, XRP – at a predetermined price on or before specific expiry date. A call, therefore, is preferred by bullish speculation, while a put option represents a bearish bet.
In December 2020, the Securities and Commission (SEC) charged San Francisco-based payment protocol developer Ripple Labs, which has close ties with XRP, with violating securities laws by raising $1.3 billion through XRP sales to investors. As a result, the token crashed even as bitcoin and the broader market went berserk.
Last week the SEC and Ripple Labs filed for a so-called summary judgment – a legal process where a court makes a decision based on the facts that have been provided without ordering a trial – raising expectations of a final ruling before the year-end. That would eliminate a significant source of uncertainty in the XRP market.
The XRP rally indicates that news- or event-driven trading is the flavor of the season. Another sign: ATOM rallied sharply early this month on expectations that network Cosmos will announce the interchain security at a Sept. 26 conference, opening doors for the token to capture value from the entire network.
For XRP, the daily chart appears to have flipped bullish with the token exiting a 10-month-long bearish trendline.
"If the ruling is in Ripple's favor, XRP could rally quickly to [68 cents] and then potentially to [93 cents] (Fibonacci retracement levels)," Lo told CoinDesk, adding that fund clients and high-net-worth individuals have been buying 50 cent strike XRP calls expiring on Dec. 30.
Theoretically, buyers of the 50 cent strike calls are betting that the cryptocurrency will rally beyond 50 cents before the expiry.
"Buying a call option provides exposure to the potentially explosive upside move while capping the potential loss," Lo said.
A call buyer pays compensation in the form of options premium to the seller for offering protection against price rallies. The premium paid is the maximum money a call buyer stands to lose in case of a market slide. In contrast, the maximum profit can be unlimited, because, in theory, an asset can rally to infinity.
However, trading options is generally more complicated as several factors, such as time to expiry and volatility, influence prices. It is better suited for sophisticated or institutional investors with ample capital supply.