Table of Contents
1 Key Takeaways
- Crypto options trading is a derivative contract that allows speculators to bet on the price movement of cryptocurrencies without actually owning them.
- There are two types of options involved: call options, which give the right to buy the underlying asset at a predetermined price, and put options, which give the right to sell the underlying asset at a predetermined price.
- The expiration date of options contracts determines when they become void and cannot be exercised anymore, and traders can choose from various expiration dates based on their strategies and objectives.
2 What is Crypto Options Trading?
Crypto options trading is a derivative contract that allows you to speculate on the price movement of cryptocurrencies without actually owning the underlying assets.
It differs from spot trading (buying actual cryptocurrencies) as it gives you the right, but not the obligation, to buy or sell the underlying asset at a predetermined price (known as the strike price) within a specified time frame (known as the expiration date).
There are two types of options involved in crypto options trading: call options and put options.
A call option gives you the right to buy the underlying asset at the strike price, while a put option gives you the right to sell the underlying asset at the strike price.
Options contracts have an expiration date, which is the date by which you must exercise your options.
The strike price determines the price at which the underlying asset can be bought or sold.
You can profit from options contracts by correctly predicting the price movement of the underlying asset.
If the asset moves in your favor, you can exercise their option and make a profit.
If not, you can let the option expire and only suffer the loss of the premium paid for the option.
In this article, we will explore the key elements of crypto options trading, including strike prices, expiration dates, and different types of options.
Additionally, we will delve into the options trading strategies in crypto and concepts that you should be aware of when trading this type of derivative contract.
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3 How Does Crypto Options Trading Work?
Here I list the key components of crypto options trading that you should know while trading crypto.
▍Calls, Puts Options, and Strike Price
Call Option
A call option grants the holder the right to buy the underlying asset at a predetermined price, known as the strike price.
It is commonly used when you expect the price of the asset to rise.
For example, if you believe that the price of Bitcoin will increase, they can buy a call option on Bitcoin.
If the price does indeed go up, they can exercise the option and buy the Bitcoin at the lower strike price, making a profit.
Put Option
On the other hand, a put option gives the holder the right to sell the underlying asset at the strike price.
Traders often use put options as a form of risk management strategy to protect against potential price decreases.
For instance, if you own Ethereum and are worried that its price might fall, you can purchase a put option on Ethereum.
If the price does drop, you can exercise the option and sell their Ethereum at the higher strike price, mitigating their losses.
Different cryptocurrencies have varying increments for their strike prices on crypto options exchanges.
For example, on Deribit, a popular crypto options platform, strike prices for Bitcoin options are determined in increments of $100, while on Bit.com, strike prices for Ethereum options are determined in increments of $10.
Expiration Date
Expiration Date refers to the date on which an option contract becomes void and cannot be exercised any longer.
Usually, you are able to choose from various expiration dates based on your options trading strategies, and objectives.
Some common expiration dates include daily, weekly, monthly, and quarterly options.
When the expiration date is reached, you have two choices.
You can either exercise the option by buying or selling the underlying asset at the strike price or let the option expire.
The value of an option is determined by the difference between the current price of the underlying asset and the strike price.
Having different expiration options allows you to align your positions with anticipated price movements in the crypto market.
Short-term traders may prefer daily or weekly options to capitalize on immediate price fluctuations, while long-term investors may opt for monthly or quarterly options.
▍Option Premium
The option premium refers to the current market price of the option, which is paid to the option seller or writer.
There are several factors that influence the option premium.
Underlying Crypto Asset
Firstly, if the underlying crypto asset has a higher market price, it generally leads to a higher option premium.
Market Volatility
Secondly, market volatility also affects the option premium.
Higher volatility tends to increase the chances of the option ending up in the money, leading to higher premiums.
Duration of the Option
Additionally, the duration of the option contract impacts the premium.
Longer contract durations tend to have higher premiums due to the increased exposure to price movements.
Strike Price
Lastly, the strike price, which is the predetermined price at which the option can be exercised, also influences the premium.
If the strike price is closer to the current market price of the underlying asset, the premium is likely to be higher.
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▍Underlying Assets
These are the digital assets on which the options contracts are based.
Underlying assets can include popular cryptocurrencies like Bitcoin or Ethereum, as well as other digital assets available in the cryptocurrency market.
Derivative contracts are used to determine the prices of these underlying assets in the cryptocurrency market.
These contracts derive their value from the underlying assets, allowing you to speculate on the price movements of these assets without actually owning them.
The movement of underlying assets can also provide valuable signals for market movement.
▍Physical vs. Cash Settle
In crypto options trading, there are two main methods of settlement: physical settlement and cash settlement.
These methods determine how the underlying asset is exchanged upon execution of the contract.
Physical settlement involves receiving the actual underlying asset upon exercise of the option.
For example, if you have a call option on Bitcoin and you exercise it, you will receive the physical Bitcoin itself.
Similarly, if you have a put option on Ethereum and you exercise it, you will be required to deliver the physical Ethereum.
On the other hand, cash settlement involves receiving the cash equivalent of the underlying asset at the expiration of the option.
This means the option holder receives a cash payment equal to the difference between the strike price and the current market price of the underlying asset.
This eliminates the need to physically acquire or deliver the asset.
Each settlement method has its own advantages and disadvantages.
Physical settlement offers the advantage of ownership of the actual asset, allowing for potential profit from price appreciation and other benefits associated with owning the asset directly.
Cash settlement, on the other hand, provides simplicity and convenience.
However, the cash equivalent may not fully capture the potential profit from owning the underlying asset, and it exposes the option holder to counterparty risk in case of default by the party responsible for the cash settlement.
▍In The Money (ITM)
ITM refers to a situation where the option has intrinsic value and is therefore profitable if exercised.
This concept applies to both call options and put options.
For a call option to be in the money, the current market price of the underlying asset must be higher than the strike price of the option.
In this scenario, the option holder has the right to buy the asset at a lower price than its current market value.
The higher the current market price is above the strike price, the more profitable the call option becomes.
On the other hand, a put option is in the money when the current market price of the underlying asset is lower than the strike price.
This means that the option holder has the right to sell the asset at a higher price than its current market value.
The larger the difference between the strike price and the current market price, the greater the profitability of the put option.
The in-the-money status of an option is crucial because it determines the likelihood of the option being exercised.
When an option is in the money, the option holder can potentially profit from exercising the option or by selling it to another investor in the market.
▍Out of The Money (OTM)
When a call option is considered OTM, it means that the current market price of the underlying asset is lower than the strike price.
Conversely, a put option is considered OTM when the current market price is higher than the strike price.
Being out of the money signifies that exercising the option would result in a trade that is not profitable, disregarding the premium initially paid.
In other words, if you were to exercise an OTM call option, you would be buying the asset at a higher price than its current market value.
Similarly, exercising an OTM put option would mean selling the asset at a lower price than its market value.
In the crypto market, the status of an option being out of the money impacts the likelihood of it being exercised.
Generally, options that are out of the money are less likely to be exercised because they do not provide immediate profitability.
Traders typically seek to exercise options that are in the money to capitalize on the difference between the strike price and the current market price.
▍At The Money (ATM)
ATM refers to a situation where the strike price of an option is equal to the current market price of the underlying asset.
This means that the option has not yet reached a profitable state, but it is also not in a loss-making position.
The significance of an ATM option lies in its potential to become either in the money (ITM) or out of the money (OTM).
If the price of the underlying asset moves favorably, an ATM call option can become ITM, while an ATM put option can become OTM.
The outcome depends on whether the price rises above or falls below the strike price during the option’s lifespan.
Compared to ITM and OTM options, which have clearer profit or loss potentials, ATM options are more uncertain as they are on the borderline of profitability.
Traders who hold ATM options carefully monitor price movements, as even slight changes could determine whether the option will become profitable or unprofitable.
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4 Pros of Crypto Options Trading
Crypto options trading offers several advantages or benefits for traders looking to participate in the cryptocurrency market.
▍Flexibility
Firstly, it provides a flexible way to make money from cryptocurrencies.
Crypto options allow you to speculate on the price movement of crypto assets without actually owning the underlying asset.
This flexibility allows you to take advantage of various market conditions, whether the price is going up, down, or trading within a range.
▍Limited Risk
With options contracts, you have the right, but not the obligation, to buy or sell a specified amount of the underlying asset at a predetermined price (strike price) within a specified time frame.
This limited risk means that you know your maximum potential losses upfront, which can help manage risk more effectively.
▍Profit Even When Prices Go Opposite
Moreover, one of the key advantages of crypto options trading is the ability to profit even if the underlying asset’s price doesn’t move as expected.
Unlike spot trading in crypto, where traders rely on price movements for profit, options traders can make money through various strategies like selling options, where they can earn income from the options premium without needing the market to move in a specific direction.
▍Only Require Small Amounts To Start
Crypto options trading allows investors to invest small amounts regularly.
Rather than needing a large capital investment upfront, individuals can start with smaller amounts and gradually increase their investment as they gain confidence and experience.
This approach can help spread out the risk and allow for more controlled exposure to the crypto market.
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5 Cons of Crypto Options Trading
While there are several benefits to crypto options trading, it is important to consider the risks and potential losses involved.
▍Potential Losses
One of the main cons of crypto options trading is the potential for significant losses.
Options traders can lose their entire investment if the market moves against their position.
Unlike spot trading, where losses are limited to the amount invested, options trading in crypto can result in a complete loss of the premium paid for the options contract.
▍Unexpected Costs
Furthermore, the price of an option can change quickly, leading to unexpected costs.
The movement of the underlying asset, time decay, and market sentiment can all impact the price of an option, making it difficult to accurately predict how much it will cost.
▍Hard To Predict Profits
The actions of other traders can affect the profitability of options trades, making it challenging to predict and achieve desired profits.
This element of unpredictability adds to the overall uncertainty and risk associated with this form of trading.
▍Limited Control
Additionally, it is important to acknowledge that crypto options trading has a gambling aspect to it.
You have limited control over the movement of underlying assets, relying heavily on luck and market conditions.
This lack of control can contribute to potential losses and make it difficult to consistently generate profits.
6 Types of Options
▍American-Style Options
American-style options provide you the flexibility to exercise your rights at any time before the expiry date.
This means you can choose to buy or sell the underlying asset at the strike price whenever it is deemed advantageous.
This is particularly beneficial in situations where the price of the asset moves significantly before the expiry date.
This flexibility comes at a cost, as American-style options generally have a higher premium compared to European-style options.
▍European-Style Options
European-style options can only be exercised at the expiration date.
This means you do not have the flexibility to exercise the option before the predetermined expiration date.
One benefit of European-style options is that they typically have a lower premium compared to American-style options.
This is because the inability to exercise the option before the expiration date reduces the value and cost of the option premium.
Another advantage of European-style options is that they eliminate the risk of the option holder exercising the option at an unfavorable time.
Since the option can only be exercised at expiration, you do not have to worry about sudden price movements affecting the value of the option before the expiration date.
However, the lack of flexibility with European-style options can be viewed as a drawback by some traders.
They miss out on the opportunity to take advantage of price movements in the underlying asset before the expiration date.
This limits their ability to adjust their options position based on changing market conditions.
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7 Strategies Used in Crypto Options Trading
▍Covered Calls
Covered calls are a conservative strategy that allows you to benefit from stable or mildly fluctuating markets while generating income from the option premium.
It can be an effective way to enhance the returns on an existing asset position.
Covered calls are often employed when you expect the price of the underlying asset to remain relatively stable or only experience minor fluctuations.
By selling call options, you can generate income through the collection of the option premium.
Here’s how it works:
Firstly, you own the asset, such as a cryptocurrency or a digital token.
You then sell call options on that asset, giving the buyer the right to purchase the asset at a specific price (known as the strike price) within a specified time frame (the expiration date).
In return for selling these call options, you receive a premium.
If the asset’s price remains below the strike price throughout the duration of the options contract, the options expire worthless, and you keeps the option premium as profit.
However, if the asset’s price exceeds the strike price, the options may get assigned, meaning you have to sell your asset at the strike price.
In this case, you still keep the option premium, but they may miss out on potential gains if the asset’s price continues to rise.
▍Naked Puts
Naked puts are considered a bullish strategy because you are betting on the price of the underlying asset to increase.
The strategy sells put options without actually owning the underlying asset.
In this strategy, you sell put options, giving the buyer the right to sell the underlying asset at a specific price (the strike price) within a specified time frame (the expiration date).
By selling these put options, you are essentially making a bet that the price of the underlying asset will go up, making the put options worthless.
If the price of the underlying asset does go up or remains above the strike price until the options expire, the options will expire worthless, and you can keep the premium received from selling the options as profit.
However, if the price of the asset goes down, the options may get assigned, meaning you have to purchase the asset at the strike price.
In this case, the premium received from selling the options can help offset any potential losses.
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▍Long Put
This strategy is implemented when you anticipate a decline in the price of the asset.
The long put strategy involves purchasing put options at a specific strike price while simultaneously selling an equal number of put options at a lower strike price.
Both options have the same underlying asset and expiration date.
If the price of the asset drops below the strike price of the purchased put options, you can exercise your right to sell the asset at the higher strike price.
This allows you to net the difference between the asset’s market price and the strike price.
On the other hand, the sold-out options at the lower strike price will expire worthless.
This strategy provides you with the opportunity to limit their potential losses while also having the potential for substantial gains.
If the asset’s price increases or remains above the strike prices, your losses are limited to the initial investment made in purchasing the put options.
However, if the asset’s price declines, you can potentially earn a profit equal to the difference between the strike prices, minus the premium paid for the put options.
The long put strategy is a type of vertical spread for you to capitalize on a bearish market outlook while limiting potential losses and gains.
▍Bull Call Spread
This strategy is specifically used if you hold a bullish view of a certain cryptocurrency and expect its price to rise.
To implement a bull call spread strategy, you start by purchasing call options at a specific strike price.
A call option gives you the right, but not the obligation, to buy the underlying asset at the strike price within a specified period of time.
You then sell call options at a higher strike price.
This combination allows you to participate in potential upside price movements of the underlying cryptocurrency while also limiting their potential losses.
The goal of a bull call spread is to capitalize on the price difference between the purchased call options and the sold call options.
If the price of the cryptocurrency rises above the higher strike price, you can exercise your right to buy the cryptocurrency at the lower strike price and sell it at the higher strike price.
This allows you to profit from the difference between the two strike prices.
▍Bear Put Spread
The strategy is used to profit from a drop in the price of a digital asset.
Bear put spread involves buying put options and simultaneously selling put options at a lower strike price.
The goal of the bear put spread is to capitalize on the price difference between the purchased put options and the sold put options.
If the price of the digital asset drops below the lower strike price, you can exercise your right to sell the asset at the higher strike price and buy it back at the lower strike price.
This enables you to profit from the difference between the two strike prices.
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▍Iron Condor
The strategy is commonly used when you anticipate that the price of a digital asset will remain within a certain range.
The iron condor strategy is considered neutral because it benefits from the price of the asset staying within the specified range.
By selling call options with a higher strike price and putting options with a lower strike price, you collect premiums from both options.
If the price of the digital asset stays between the two strike prices throughout the options’ expiration, the options that were sold will expire worthless.
This results in a profit from the premiums collected.
The iron condor strategy is particularly appealing for traders who expect the market to be relatively stable and prefer to capitalize on the time decay of options.
It allows them to take advantage of the range-bound nature of the market while limiting potential losses.
8 How to Buy and Sell Bitcoin Options?
To buy Bitcoin options, you can follow these steps:
1. Determine The Contract Duration
You should decide on the length of time they want your options contract to be active.
This can range from a few hours to several months.
2. Find a Counterparty
Traders need to match with someone who is taking the opposite position in terms of betting on the price movement.
If one trader is buying a call option, you need to find another trader willing to sell a call option.
3. Agree on Terms
Both parties need to agree on the strike price, contract duration, and the premium, which is the price of the option.
To sell Bitcoin options, the process is the same, but in reverse.
You can choose to sell either call or put options, offering them to potential buyers.
When the contract reaches its expiration date, the option holder can choose to exercise their rights based on the agreed-upon price.
If the market price is favorable, you can execute the option and either buy or sell Bitcoin.
9 Is Crypto Options Trading Different From Traditional Options Trading?
Crypto options trading differs from traditional options trading in several key ways.
▍Operation Time
The crypto market operates 24/7.
This is in contrast to traditional options trading, which typically takes place during specific market hours.
The round-the-clock nature of the crypto market provides traders with greater flexibility and the ability to react quickly to market movements at any time.
▍Volatility
The crypto market is known for its higher volatility compared to traditional financial markets.
This higher volatility can result in wider price fluctuations, making it a potentially more lucrative market for options traders.
This volatility also means that you can potentially earn higher returns in crypto options trading compared to traditional options trading.
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10 What platforms provide crypto options trading?
When it comes to crypto options trading, there are several platforms that offer this service to traders.
Here, we will explain and list some of the leading platforms in the market.
▍Bitget
Bitget is a leading crypto options trading platform that offers a wide range of options contracts on digital assets like Bitcoin, Ethereum, and more.
With Bitget, you can choose from different types of options, including American-style and European-style options, and execute options trades with competitive trading fees.
▍Bybit
Bybit is a popular crypto options trading platform that allows traders to trade options on various crypto assets.
It provides a user-friendly interface and offers a wide range of options for contracts with different strike prices and expiry dates.
▍Binance
Binance is another well-known platform that offers crypto options trading. With a large user base and high trading volume, Binance provides traders with a robust options trading experience.
They offer both European and American-style options, giving traders more flexibility in their trading strategies.
▍Bit.com
Bit.com offers a range of options contracts on popular cryptocurrencies like Bitcoin and Ethereum.
You can choose from different strike prices and expiry dates to suit your trading preferences.
▍OKX
OKX is a well-established crypto options trading platform that provides traders with a comprehensive options trading experience.
They offer a variety of options contracts and have a competitive fee structure.
11 Is Crypto Options Trading Profitable?
Crypto options trading can be a profitable venture if executed with careful analysis and strategy.
The potential profitability of crypto options trading lies in the ability to leverage price movements in underlying assets.
One important concept to consider is the options Greeks, which are metrics used to assess an option’s risk and potential profitability.
These include factors such as delta, gamma, theta, and vega.
Understanding these metrics is crucial for you to assess potential profits and make informed decisions.
Moreover, selling options can be more profitable than trading options outright.
When selling options, investors receive premiums upfront and may benefit from time decay (theta), which erodes the value of the option over time.
However, it is worth noting that selling options also expose you to potentially unlimited losses and careful risk management is essential.
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12 Should You Trade Crypto Options?
Crypto options trading may be suitable for individuals looking to maximize crypto market volatility, achieve higher returns, gain greater exposure to digital assets, and reduce transaction costs.
One of the key benefits of trading crypto options is the ability to profit from the volatile nature of the cryptocurrency market.
By trading crypto options, you can potentially achieve higher returns compared to traditional crypto spot trading.
This is because options provide leverage like crypto futures contracts, meaning you can control a larger amount of the underlying asset with a smaller initial investment.
With options, you can speculate on the future price of cryptocurrencies without actually owning them.
This opens up opportunities for diversification and risk management.
However, the volatile nature of the cryptocurrency market can lead to significant losses if options are not managed properly.
Additionally, there is counterparty risk, as crypto options contracts rely on a counterpart to fulfill their obligations.
I suggest you learn these top crypto options trading strategies before start trading them.
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