Can You Trade Options On Bitcoin?

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Yes, you can trade options on Bitcoin. Furthermore, the Bitcoin options ecosystem is currently seeing exponential growth, with Bitcoin Options exchanges becoming more sophisticated and more tools becoming available.

How Bitcoin options work

Bitcoin options are almost identical to options of traditional markets, in most aspects. Traders can buy or sell calls and buy or sell pus. Each contract also has a strike price and an expiry date, that determines the value of the option.

The most popular Bitcoin options contract is “European style“, which can only be exercised at the expiry of the option. This is in strong contrast to “American style” options, which can be exercised at any time.

That said, it’s important to note that while the options can only be exercised at the expiry, traders can close the position at any time. This is achieved by setting a limit order or by closing the position at market (if there is liquidity to do so).

Bitcoin options exchanges

The two most popular Bitcoin options exchanges are Deribit and FTX. Both offer a large variety of strike prices and expirations, for the trader to choose from.

On the contrary to traditional options brokers, like Robinhood, crypto options exchanges do NOT require deposits to be made in fiat currencies (USD, EUR, GBP, etc). Some do not even offer the option to do so.

Instead, Bitcoin or Ether is used as the asset to purchase options. Individuals wanting to trade Bitcoin options, but that don’t own any BTC or ETH yet, will have to purchase some first on an exchange like Coinbase or eToro.

That said, one aspect they DO share with traditional trading avenues is that identity verification is mandatory for traders looking to withdraw funds above a certain threshold. 

Using FTX as an example, unverified traders can only withdraw up to 9,000 USD per day, if their trading volume exceeds the withdrawal amount.

The identity verification process is usually not very demanding. Most exchanges simply ask for a picture of your identity document and your residential address.

Trading fees are usually charged as a fixed commission on the notional value traded. In the case of Deribit, a fixed fee of 0.04% is charged for each transaction.

Regulatory challenges

Before diving into Bitcoin options, please keep in mind that it’s a largely unregulated environment. 

And while it’s true that the lack of regulation creates big opportunities in some situations, it also carries substantial risks with it. A key example being that if an exchange gets hacked, it can result in the loss of all your funds.

Most Bitcoin options trading avenues prohibit US citizens from using their platform. This is the unfortunate consequence of strict financial regulations in the United States.

Some US Citizens attempt to circumvent this restriction by making use of VPNs, however, please keep in mind that this practice is against the terms and conditions of the exchanges and is likely to result in a frozen account.

At the time of writing, the only US-friendly BTC options trading platform is the CME.

pascal thellmann

Pascal Thellmann is an algorithmic trader mostly focused on crypto breakout strategies. He started CoinDiligent to share his learnings and give paid access to some of his automated trading strategies. You can get in touch with Pascal on LinkedIn or Twitter.

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