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What Are Bitcoin Options?

Guest Post | Sep 21, 2022

Options - What Are Bitcoin Options?

Bitcoin Short History

Bitcoin was created in 2009 as a safe haven from government oversight. It was a developer’s response to the housing crash of 2008, using his knowledge of economics and cryptography. Although there are thousands of coins in the cryptocurrency market, Bitcoin has retained its significance in cross-border payment and is even made better with competition for the lowest fee bitcoin exchange.

Thankfully, there are more advanced ways of profiting off the volatility of Bitcoin beyond the common buy-hold-sell strategy. Bitcoin options trading is one of these advanced methods.

Are There Options on Bitcoin?

Yes. Traders can buy options contracts to speculate on the future price of Bitcoin. For buyers, options offer a way to hedge their long positions and enjoy leverage at a capped loss. In contrast, options writers get to enjoy the flexibility and keep the premium if the options expire worthlessly.

Bitcoin Call Options

When you believe the price of Bitcoin will increase past a certain level, you can buy a call option. Your option will be exercised if Bitcoin increases past the price on/before the closing date. If, however, the price of Bitcoin does not touch your presumed price, you only lose your premium paid.

Bitcoin Put Options

In the same way, when you believe the price of Bitcoin will drop to a certain price, you can buy Bitcoin puts. Your losses are capped as you only lose the premium if Bitcoin does not eventually fall to the strike price.

Holding and Writing Bitcoin Options

For every buyer, there has to be a seller. Every crypto option bought was written by a trader. Options are mostly for flexibility, as they allow traders to enjoy passive income in premiums if the option expires worthless. With the volatility of the crypto market, writers are betting that Bitcoin will not reach the seller’s assumed price.

The Greeks

Are there any metrics that gauge the strength of Bitcoin options against the spot price of the cryptocurrency? Yes. Bitcoin Greeks is the collective name given to these metrics.

Greeks are used by investors to gauge various metrics — from the volatility of the option to its sensitivity.

The five popular Greeks are Delta, Gamma, Vega, Theta, and Rho and these five form the basis of every other Greek you may come across in the future.

5 main greeks - What Are Bitcoin Options?

Bitcoin vs Bitcoin Options

How does Bitcoin option compare to Bitcoin? Why should traders consider one over the other?

Hedging

Market sentiments can prove to be irrational, with Bitcoin experiencing some months of corrections. For large Bitcoin holders, put options can be a way to make a short-term profit from a cryptocurrency correction while still maintaining ownership of their longs.

long straddle - What Are Bitcoin Options?

Price Speculation

The ratio of crypto call to put options can indicate the overall market perception of where an asset’s price is heading. Crypto currency options can be used to speculate on Bitcoin’s future price.

The Benefit of Leverage

One option contract is equivalent to 100 cryptocurrencies. If you buy a BTC contract, it’s invariably saying you bought 100 BTC. With options. Traders can leverage their positions at a little cost.

See:  The Growing Relevance Of Bitcoin In Real Estate

Closing Dates

All options expire, no matter how long they’ve existed. Closing dates give options traders the chance to make achievable, measurable targets on short-term movements of Bitcoin.

How to Trade Bitcoin Options

The first step is choosing an exchange that allows Bitcoin options.

Next, choose your strike price. Most exchanges have put options at one end and call options at the other.

So, how to buy Bitcoin options depends on the exchange, but basically, you will see the Ask and Bid prices. If you want to sell the options strike price, the Ask shows the premium you will receive for doing so. If you want to buy, the bid shows how much you will pay to buy the options contract.

Pay for the contract and wait for the closing date. If your options are American-type options, you can exercise the contract anytime before the closing date.

Are Bitcoin Options A Good Investment?

Bitcoin options can provide a low-risk approach to profiting off the crypto market. Although the process to trade Bitcoin options involves combining different buy and sell tactics to make the most of the existing market volatility, they can be as simple as buying Bitcoin futures.

Conclusion

It is advisable to gain enough knowledge before trying BTC options trading as it is easy to lose money. Nonetheless, some exchanges like Redot are working on a simple-interfaced way to trade options. Hopefully, this would make them a one-stop shop for where to buy Bitcoin options.


NCFA Jan 2018 resize - What Are Bitcoin Options?The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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