How to Trade Bitcoin Options (Basics, Strategies, Risks, and Exchanges)

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As Bitcoin continues to mature as a store of value and currency, it was just a matter of time until Bitcoin options started to emerge. 

The first exchange to popularize BTC options was Deribit, however, it’s now far from being the only platform where they can be traded.

Since the Bitcoin options market is still very nascent, there are plenty of inefficiencies that savy cryptocurrency traders can exploit. 

This article outlines the basics of what options are, how they work in the Bitcoin world, some actionable BTC options strategies, and where to trade them.

Introduction to Bitcoin Options 

Options are a type of derivative contract that give its owner the right to buy or sell an asset at a specific price (the “strike” price) until a determined date (the “expiry” date).

The precise date they were first used is unknown, but they were already in use in Ancient Greece and then actively traded on a dedicated exchange that was launched in the 17th century in Japan.

Although options were initially designed to enable farmers to protect themselves against adverse price developments in the goods they were producing, today they are a multi-trillion dollar market that are part of the very backbone of the global financial sector. 

While the exact size of the options market is unknown, it forms a big portion of the $500 Global Trillion derivatives market

Bitcoin’s option market is certainly still magnitudes smaller, but it’s also seeing parabolic growth.

bitcoin options volume

At the time of writing the Bitcoin options market regularly clocks in over $100m in daily trading volume, and is set to see further growth with firms like the CME joining the game.

Types of Options: Puts and Calls

There are two types of options: calls and puts.

Call options give their owner the right to buy Bitcoin at a specified price. Puts are mostly used by traders betting on a price rise in BTC, or hedgers protecting themselves for the possibility of it.

bitcoin deribit call options

Call options are said to be “out of the money” if the Bitcoin price is lower than the strike price. They are “in the money” if the Bitcoin price is higher than the strike price. If at the expiry the option is “out of the money”, it expires worthless.

Put options give their owner the right to sell Bitcoin at a specified price. They are generally used by speculators expecting the price of Bitcoin to fall, or wanting to hedge against the possibility of a price decline.

bitcoin deribit put options

Put options are said to be “out of the money” if Bitcoin price is higher than the strike price. They are “in the money” if the Bitcoin price is lower than the strike price. If at the expiry the option is “out of the money”, it expires worthless.

In addition to the option’s intrinsic value (“in the money” or “out of the money”), efficient markets usually pay a premium on top of that value for what “could happen”. 

This is called the “Time Value” and is larger the further the option is from its expiry date.

Options trading strategies

As you have already realized by now, options are highly sophisticated derivatives contracts. This opens the door to a wide range of strategies to trade them. 

While there are endless options trading strategies, here we’ll cover the 3 most popular ones, to get you started.

Covered Call

A covered call strategy consists in holding the underlying asset, while simultaneously selling a call option. Investors do this to earn a yield on their holdings from the options premium.

This could be an interesting strategy for a Bitcoin holder that believes the BTC price will stay mostly flat for the time being, but doesn’t want to sell his holdings.

Protective Put

A protective put strategy consists in holding the underlying asset, while simultaneously purchasing a put option. Investors use this strategy as “insurance” if they believe the asset could see some downside.

A Bitcoin investor could use this strategy if price has gone up significantly in a short time. This way, the Bitcoin holder would be protected in the case of a sharp price drop, but would still capitalize if BTC kept running higher.

Straddle

Straddles are an options strategy that doesn’t bet on the market going a particular direction. Instead, traders are betting on Bitcoin volatility, in either direction.

In a straddles trade, the speculator purchases call and put options with the same strike price. This will result in a profit as long as the asset moves far from said strike price.

Bitcoin investors can use this strategy if they expect BTC to make a big move, like during an important event or period of low volatility, but are unsure which direction the move will happen.

Where To Trade BTC Options?

Options are still a very new derivatives product in the Bitcoin economy. Hence, there are still significantly less avenues to trade it than the more adopted Bitcoin Futures contracts.

At the time of writing, by far the most popular Bitcoin Options exchange is Deribit.

deribit bitcoin options

Deribit currently offers 6 different expiry dates with 20 different strike prices for each. The simple user interface and low trading fees (0.04% per options trade), make Deribit a great options exchange for beginners.

More sophisticated options traders might want to have a look at FTX, which recently also launched Bitcoin Options. On the contrary to Deribit, FTX does not have a pre-set options orderbook and traders can instead manually design their own option. 

ftx bitcoin options request quote

To do so, simply head over to the “Options” tab on the exchange, and fill out the form with your desired strike price and expiry date. After just 10 seconds, the exchange will present you a bid and ask price, which you can chose to fill or not. 

The exchange’s 0.05% trading fee makes it a bit more expensive than Deribit though.

Finally, it’s also important to note that exchange juggernaut CME recently also launched Bitcoin Options. That said, with a minimum trade size of 5 BTC, most retail traders will likely be more comfortable using Deribit or FTX.

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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