Current Discounts with Leading Bitcoin Options Brokers:
Options are derivative contracts, which make it possible (but not mandatory) for the holder to purchase or sell an asset, in this case Bitcoin, at a fixed price within a preset time frame. This price is also known as the strike price. Bitcoin options enable traders to speculate on the cryptocurrency’s price, generate income, and hedge their positions, especially when the market is more volatile than usual.
As with typical contracts, option contracts have a seller and a buyer. A number of factors determine the premium, which is what the buyer pays for the options contract. These include implied volatility, time to expiry, and moneyness – the difference between the current price and the strike price of Bitcoin. The premium is then acquired as income.
Both Bitcoin miners and long-term holders can generate income and hedge their positions effectively by selling options. Traders speculating on price get upside exposure for a very low portion of the cost and reduce risks.
Popular Bitcoin Options Platforms
Some popular Bitcoin Options platforms include Deribit, BitMEX, and Quedex. We’ll compare them in this section.
Deribit makes it possible to buy cash-settled Bitcoin and Ethereum options. The buyer can exercise the options on the expiry date. They get any profit generated on this date in cash (“cash-settled”), which is a big plus. Deribit charges 0.0004 on BTC options contracts, equivalent to 0.04% of the underlying contract value.
This exchange is very safe. It holds up to 99% of client funds in a cold wallet and boasts very strict internal security controls, thanks to which the platform has never been hacked.
Quedex features standardization of futures options trading. Effectively, this means they are inverse options. The nominal value of each option is $1. This makes it possible for investors to hedge on a number of different derivative platforms.
This exchange charges a taker fee of just 0.03% when it comes to options settlement. There is no fee when providing liquidity.
Quedex users can buy options contracts across three expiration terms: BTC/USD options with weekly, monthly, and quarterly maturity terms. You can use risk metrics and payoff charts to analyze option price dynamics, visualize your option’s profit potential on the trading dashboard, and submit orders by using BTC quotes or implied volatility for advanced options trading according to the official website.
Other advantages of using Quedex include an auction-based bankruptcy prevention system and high security with multi-signature cold wallets and PGP-based communications. Quedex is licensed in Gibraltar.
The last of the Bitcoin options trading platforms we recommend features a simple fee structure: 0.075% maker fee, 0.025% taker fee, and a settlement fee of 0.05%. One of this platform’s best features is the ability that it gives to structure a synthetic futures contract option.
BitMEX offers a limited loss contract. This is a special futures contract that has a fixed upper limit on losses investors can incur prior to immediate liquidation of their position. This principle stems from traditional futures markets, where you get a margin call instead of a liquidation. In that case, you’re still liable for losses if you can’t meet your margin. From this, it follows that standard futures contracts are riskier than options.
You need to set up an initial margin for the position when using this exchange. One can consider this margin parallel to the premium paid for a “traditional” Bitcoin option. Before you lose all your capital, the exchange’s liquidation engine will terminate your position in case the price of the futures contract drops.
BitMEX boasts higher liquidity of the BTC/USD pair than any other exchange as well as a daily trading volume of almost one billion dollars, recent data of CoinMarketCap show. However, bear in mind that these futures are not pure option tools, as attractive as they may be. Compared to traditional options, they might not react well to market volatility and other conditions.
How Does Bitcoin Options Trading Work?
Like derivative instruments, the value of options depends on the value of other assets. Unlike futures, options don’t have to be acted on if the holder doesn’t believe this will be profitable for them in the long run.
We mentioned options basics such as time to expiry, current and strike price, moneyness, premium, payoff, and volatility. We’ll now go into them in greater depth.
Time to Expiry
Options expire at a predetermined time in the future. Some options can be purchased or sold at this time and only then. Others are more flexible, giving holders the freedom to leave the trade at a point in time they choose before expiry. Time to expiry can range from seconds, as with binary options, to months or years into the future. Option prices are often determined by the expiry date. Short-term options tend to be less profitable than long-term ones if all other factors remain constant.
Current and Strike Price
Strike price and current price are two of the most critical aspects affecting the price and payoff of an option. The price, at which the asset is available in the market, is the current asset price. The option holder agrees to sell or buy Bitcoin at the strike price, which is the price of Bitcoin at expiry.
“In the money” (ITM) and “out of the money” (OTM) are two important terms in options trading. They refer to whether the trade will be viable for the trader at the principal price. If you have a “put” option, you’ll be in the money if Bitcoin’s price drops below the strike price. If you have a “call” option, you’re in the money if its price remains above the strike price.
While we’ll go into call and put in more detail later, the basic premise is that OTM is when you let the option expire because exercising it isn’t in your best interest. In technical terms, letting an option expire means it becomes “worthless”. However, this term is misleading. A worthless option can be quite valuable to investors, who enjoy limited liability and much higher leverage by buying OTM call and put options.
As the strike price is sufficiently far away from the current one, OTM options tend to trade cheaply. You only lose the premium if the outcome you anticipate doesn’t materialize.
Another aspect that will reduce the premium, which is more important, is low observed volatility for currencies, fixed income, and equities. If Bitcoin’s price is OTM and shifts negligibly, the premium will cost less. This, in turn, will provide larger gearing.
The trader makes a payoff when the option expires. This is positive if it was ITM when it expired. The payoff is the difference between the asset price and the strike price.
Option volatility is another factor that’s considered when determining the option price. Volatility determines the price because it accounts for any shifts in Bitcoin’s market value. This factor determines the variation of the cryptocurrency’s price from a given mean. The greater the volatility, the more expensive an option will be. In volatile conditions, there will be rapid and frequent shifts from ITM to OTM and vice versa.
The premium refers to the option’s price. Like with insurance premiums, the trader is essentially purchasing protection. The amount marked as the premium is the biggest amount they can lose when they invest in an option.
Is Bitcoin Binary Options Trading the Same as Options Trading?
Traditional and binary options are similar in terms of their main features. When setting binary options prices, the same inputs apply. However, there is one key difference: the structure of payoff upon expiry. 0 and 100 are the only possible outcomes when binary options expire. This explains the name “binary”. Traditional options come with variable payoff.
We’ll now go into the main binary options trading methods.
Boundary option, or range trading, features worthwhile returns regardless of market conditions. It works by betting within a specific boundary or price range. The investor wagers on whether the price will be within the price boundaries or outside them. Depending on whether it touched or didn’t touch this range, the investor either profits or suffers a loss.
One Touch Option
If you decide to use the one touch option, you must be sure the price of Bitcoin will reach or exceed the predicted value during live trade. As you may imagine, this is a high yield option. If your prediction isn’t right, you’ll lose your investment. As expiry times tend to run up to at least a few days, there is sufficient time for the price to reach the one you’ve predicted, which is definitely an advantage of using this method.
10 Minute Options
The default time limit is usually 10 minutes in binary options trade. You need in-depth knowledge of daily price movements if you choose to exercise this option. If you don’t have it, you won’t get much out of your investment.
Long Term Options
More conservative investors find long-term binary options far better due to the lower risk involved in this type of trade. With longer option commitments, investors also have more time to analyze Bitcoin price movements. Their payoff is a portion of the profit they make on the investment. If the position ends up ITM, the payoff is an average of 65% of the principal capital investment, ranging from 50% to 80%.
60 Second Options
This is the fastest-paced binary options trade. Due to this, 60 second options offer lower returns.
What is Bitcoin Call and put Options Trading?
When a trader pays a premium to purchase a specific amount of BTC on a specific date, it is a call option. They will buy it at the strike price. When they pay to sell BTC at the strike price, it’s a put option. In rudimentary terms, the buyer of a put profits when the strike price is higher than the underlying BTC price. If the underlying price is higher than the strike, the buyer of a call makes a profit.
There are four types of call and put options: short put, long put, short call, and long call.
The Short Put
If you think Bitcoin’s price will increase, you might profit from selling a put option. When you do this, you agree to purchase Bitcoin at the strike price if the buyer decides to sell. You will profit from the premium if the current price is higher than the strike price because the buyer will decide against selling.
The Long Call
Traders have direct exposure to price risk, up to the whole principal, when they purchase an asset directly. With an asset as volatile as Bitcoin, this can be risky, but the risk is limited to the premium the investor pays to buy the option when buying a call. The difference between current and strike price (in favor of the current price) makes up the potential profit, in addition to the premium. Let’s say the strike price is $200 and the investor paid a premium of $20. They would earn a profit of $20 with a current price of $240.
Long calls are actually the most profitable of all four options, particularly if the expiry date is in at least one year. It’s easy to see why. Long call options benefit from slow time decay and unlimited upside.
The Short Call
If you believed the price of Bitcoin would drop, you could sell a call option. In this process, you agree to sell your Bitcoin at the strike price if the buyer chooses to purchase. Not unlike with the short put option, short calls are aimed at collecting the premium while the buyer opts not to buy. This happens when the strike price is higher than the current price. If the current price is higher, the seller (call writer) has to sell the Bitcoin at a discount.
The Long Put
If you take a bearish view of the Bitcoin market, you might buy a put option, whereby you can sell at the strike price instead of shorting Bitcoin. Your risk is limited to the premium you paid for the option, as with the long call. The buyer profits on a put option when the current price is lower than the strike price by more than what they paid as premium. If they paid $20 as premium and the strike price is $200, they will break even with a current price of $180. If the current price is lower, they will make a profit.
The Hows and Whys of day Trading Bitcoin Options
Day trading can mean holding an asset as briefly as for a few seconds. This type of short-term trading can extend to a few hours. Of course, you’ll only make a small profit because you will need to sell your asset before the end of the day. However, this type of profit is very quick, which makes up for the limited gain.
It’s all About Fast Profit
Looking for opportunities to generate profit fast is the main principle day traders go by. Long-term trading is when you plan to hold on to your Bitcoin for a longer period of time. Some short-term gains might be lower than 1% per trade. However, traders can make a lot of money even with such small gains in the way of percentages. This is because of the bankroll they have.
The bankroll, which is the total amount of money available to the trader, is quite large. Professionals seldom risk more than 1% of the total. You can set yourself a stop loss of 10% if you buy BTC at $20,000. The system will sell your investment automatically if the price of Bitcoin goes down to $18,000. This protects you from losses if the price suddenly drops.
On the downside, it is difficult to anticipate big moves. Illiquidity is a big risk. Options that are thinly traded have large bid and ask spreads, meaning a day trader will purchase at the spread’s high price and sell near the lower one.
Day traders who want to trade options have to fulfill specific margin conditions set by security regulators. They also need to look at bigger stock watch lists, so more preparations will be required on a daily basis.
Bitcoin Options Trading Hours
Regular Bitcoin options trading hours are from 09:30 to 16:15 Eastern time, Monday through Friday. There are also extended trading hours: from 16:30 to 09:30 Eastern time from Tuesday to Friday and from 18:00 Eastern time on Sunday to 09:30 ET on Monday.
As you can see, options are complicated and can be risky. While some traders prefer to jump in the deep end, taking the time to study this kind of trade and develop a sound strategy is a more reasonable approach.