Several derivatives have helped increase the available liquidity in the crypto market. They have contributed to maintaining market equilibrium by creating an avenue for arbitrage. Crypto options are financial instruments used in hedging or speculating on an asset. Unlike futures trading, exercising an option is not obligatory. It involves exchanging an asset at a set date and price.
Options are created by sellers and bought by traders, giving them the right to call or put an asset as stipulated. They function in hedging for risks and speculating on market volatility. Options include call options and put options. A call option buys and a put option sells an asset as executed by the buyer.
Options enable hedging against market risks and flexibility in speculative trading. It allows using several trading strategies and profiting from different market trends. It supports cost reduction when entering positions and opening multiple trades concurrently.
Moreover, it is complex and involves very high risks. It requires advanced trading strategies and has low liquidity. The premium value is very volatile and changes with the expiration date. It is cost-effective and requires no premium payment to create an option.
Bitcoin Option Chain
Bitcoin option chain is a crypto option that enables the involved parties to exchange Bitcoin at a set price and expiry date. Buyers are required to pay a non-refundable security deposit (premium) before buying an option. Bitcoin option chain is less costly than directly trading Bitcoin. With options, investors can take a speculative position on the price of Bitcoin at a future date. Similarly, they trade on the volatility of Bitcoin without owning it.
Regardless of the platform, you are trading on, there are some universal terms. Call and put are essential terms of Bitcoin option chain trading. It signifies your price speculation for Bitcoin. A call represents buy and a put represents sell. Spread is the difference between the call and put and it is what the platforms earn on the transaction.
The strike price is the price that Bitcoin closes at when the Bitcoin option chain contract expires. It determines the option you buy, whether call or put. The premium is a small percentage of the contract value required to buy the option. It differs from the margin which allows trading with leverage. It is the maximum amount a buyer can lose in a trade. The contract value is the total value of the strike price. If you are buying 0.01 BTC at a strike price of $38,000, then the contract value is $380.
To calculate the premium, the duration, strike price, price of Bitcoin, and implied volatility are needed. The duration of the contract before expiry determines how high the premium would be. Implied volatility is the volatility of the market during the period of the contract and it determines the premium. The strike price is the preset price for the option that the exchange determines.
A contract consists of four parts, including size, expiry date, strike price, and premium. The size is the units of contracts a trader wants to trade. The expiry date is when the option has ended. The premium is the amount a buyer pays to own an option while the strike price is the expected price to sell or buy Bitcoin.
The strike price is involved in determining if a contract would be exercised or not. There are two people involved in these derivatives: the buyer and the seller. The seller sells his trading rights to the buyer, leaving the buyer to call or put the trade. If the buyer decides to call or put the option, the seller would have to act accordingly, receiving a premium in return.
A buyer loses his premium if he fails to execute an option. However, the seller is at a higher risk as his loss is determined by the price of Bitcoin. If a buyer exercises his call option, the seller would have to sell his Bitcoin. However, if the buyer decides to exercise his put option, the seller would have to buy Bitcoin.
There are two types of Bitcoin option chain which includes European and American forms. These forms have no relation to Europe or America. The American type allows buyers to exercise their contract between the opening and expiry dates. In essence, they can close an option before it expires, limiting losses. On the other hand, the European type does not allow for flexibility in exiting a trade before expiry. Traders cannot lock in their profits or limit their losses before the expiry date.
An option’s price is influenced by the Greeks. They determine if a trader would pay more to hold or the seller would receive more to create an option. They include Delta, Gamma, Theta, Vega, and Rho. Delta evaluates the sensitivity of the option price to that of Bitcoin. Gamma gauges the rate at which Delta changes over time. Theta measures the change in price with the expiration date. Vega measures the sensitivity of the option to the implied volatility of Bitcoin while Rho measures the sensitivity of the option price to changes in interest rates.
Basic Strategies to consider
There is a range of strategies to consider in trading these options. They are dependent on the different combinations of call and put options. They include protective puts, covered calls, straddles, and strangles.
Protective put: This involves buying a put option owned by a buyer. It is used as portfolio insurance through hedging. It guards the investor against a price drop and maintains their exposure should the price increase.
Covered call: This involves selling a call option owned by a buyer. It is used to earn extra income. The investor earns the premium and keeps his assets if it is not executed. If otherwise, he would have to sell.
Straddle: This involves buying a call and a put with identical strike prices and expiry dates, using market volatility. Traders make profits regardless of direction.
Strangle: A strangle is like a straddle but requires a low price for opening a position and higher volatility for profitability. The call option is above the market price and the put is below.
The bitcoin option is beneficial because you can make profits with little capital and are limitless. Although there are several platforms to trade Bitcoin options, you must consider their contract value, premium, variety of options, and payment methods. Notable platforms are Deribit, Binance, IQ Option, and FTX.
Cryptocurrencies are highly volatile, options trading is complex, so try to gain understanding before you start investing. Do not invest more than you can afford to lose. Have a trading strategy and a risk management plan.