The investment world is predominantly characterized by profit maximization. Every year, numerous innovations emerge to help investors make a profit in whatever capacity and in whatever field an opportunity presents itself. one of those financial instruments is called bitcoin options.
Although recently popularized, the concept of options trading dates back to the 17th century. This concept is based on a financial theory that grants certain permissions and retains certain rights. Basically, options are contracts that give an investor or trader who owns an option the right (not the obligation) to buy or sell an asset at a predetermined price and date.
Reading: Options on bitcoin
options belong to a class called derivatives, and a key attribute of assets that fall into this class is dependency. this means that the value of the options is derived from that of other instruments such as cash, bonds and other derivatives.
Options track the underlying assets and then reflect the security to be traded. Across all industries, they have proven very useful for generating income, hedging against price movements, and profiting from speculative trading.
While the concept can be technical and quite confusing, one thing is for sure: Options are a profitable tool that can definitely become an investor’s best friend. In this article, let’s discuss everything you need to know about a particular type of crypto option: bitcoin options.
the rise of bitcoin: a brief history
In recent years, bitcoin has become a household name that evokes a wide range of emotions: curiosity, hope, fear, skepticism… and much more.
Its growth over 12 years took the world by surprise. First appearing in a white paper in October 2008, pseudonymous author(s) Satoshi Nakamoto introduced a concept that would later give centralized financial institutions around the world a run for their money.
Born out of a desire to correct the flaws and misappropriations of existing financial systems, bitcoin emerged as a solution to “fraudster” middlemen and unfair financial regulations. from a value of $1 in 2011 to reaching an all-time high of $68,000 in Nov. 2021, bitcoin has seen incredible growth.
since 2011, bitcoin has grown from its first use case (as a means of exchanging pizza) to being adopted by millions of users and corporations around the world, using it in their daily transactions. In September 2021, it officially became legal tender in El Salvador, and more countries are looking to follow suit.
While bitcoin has yet to fully mature, it has come a long way and has started a new chain of events in the world’s financial systems.
are there options in bitcoin?
yes, there are. There are bitcoin options: Similar to bitcoin futures, they are a form of derivatives. they can be defined as “contracts that give an investor or trader the right to buy or sell bitcoins (but not the obligation) at a specified price (strike price) and specified date (expiration date).”
bitcoin options trading is preferable to buying bitcoin, because the cost incurred to buy an option (a premium) is less than that of the actual asset. Unlike buying and holding bitcoin, bitcoin options give you the leverage to take speculative positions (ie up or down) on the price movement of btc.
Considering how volatile the cryptocurrency asset is, bitcoin options is a beautiful concept. they allow you to benefit from the downward movement in price without suffering the loss of holding the currency itself. bitcoin options also allow you to benefit from an increase in price as if you had the real currency.
Also, bitcoin options are a great option for investors and traders who understand how it works. Apart from the high volatility of bitcoin which creates wide profit margins, the losses are limited only to the premium paid to open the positions. This potential for unlimited profits and limit losses are some of the best features of bitcoin options trading that make it attractive and in demand.
bitcoin call options
a bitcoin call option is an agreement that allows the owner of a call option to buy an agreed amount of bitcoin for a particular price (also known as “strike price”) at a particular time (expiration date) .
Consider the following (hypothetical) scenario: Suppose you think the price of a piece of land will increase in a couple of months. You discover that you can strike a deal with the seller that would allow you to buy the land at a certain price, and order the seller to sell it to you… all at the small cost of a fee (premium). would you accept the offer? probably. this same logic applies to bitcoin call options.
To clarify, the agreement simply gives you the “option” to purchase the land at that time and is not required. if you don’t have the funds at that time to close the deal, all you have to do is forfeit the deal and forfeit the fee paid.
bitcoin put options
This instrument allows the contract owner to sell bitcoins at an agreed price later. Simply put, a bitcoin put option gives you the privilege of selling your “shares”. it usually follows a downward bias, that is, when an investor feels that the price of bitcoin will decline rapidly, or is bound to do so over a certain period of time.
why would someone buy a put option on bitcoin?
To help you better understand, here is an example: mr. stone is a fruit seller who realizes that fewer people buy more fruit at a certain time of the year, causing the price of fruit to drop. Throughout this period, he runs his business constantly at a loss, because he has to sell his product at a lower price than the price he bought it for.
One day, he learns of a company that wants to buy his fruits at a predetermined price, even when that price is lower than the market price. This opportunity allows you to sell your produce to them at that price and protect yourself from going down even when other fruit vendors have no choice but to make do with less than ideal sales rates.
mr. Stone and the company enter into an agreement that requires the company to purchase its goods at a predetermined price within that period. this contract is sealed with a fee (premium). if the company refuses to honor the contract, mr. stone keeps the premium that was paid.
It is worth noting that mr. Stone decides the premium paid based on the perceived demand for his fruit at that time. the same logic applies to bitcoin put options.
hold and write bitcoin options
“hold and write” in options trading is another way of expressing the act of buying and selling. Like buying and selling, there are two sides to an options contract; on one side is the “holder” or buyer, and on the other is the “writer” or seller. This two-sided concept covers both put and call options, meaning you can go long or short on both.
The connection between a headline and a writer is the premium paid. When an investor decides to “hold” an option, he is required to pay a premium that entitles him to buy or sell bitcoins.
The opposite is true of “write”. when an investor decides to “write”, he sells his right to decide to the holder. if the holder decides to act on the option contract, the seller must keep his word and waive his right. they are only paid the premium for the decision.
source: robinhood learns
Certain terminologies are used to understand the factors responsible for the price of an option in bitcoin options trading. these terms are called the “Greeks”. they decide how much you pay to open an option contract as a holder, or how much you receive by selling an option as a writer. Although you’ll see terms like delta and theta, don’t be intimidated, we’re not going back to math/ap class. here are the five members of the Greeks:
delta reads how reactive the price of an option is to a one-time movement in the underlying price of bitcoin.
gamma indicates how much the bitcoin option delta moves, for each point of movement in the underlying bitcoin price.
theta measures the rate of deterioration of a bitcoin option over time. the lower theta, the farther from the expiration date; the higher theta, the closer to the expiration date.
vega controls the sensitivity of an option to the volatility implied by the underlying price of bitcoin. measures the rate of change of an option premium, with a 1% change in volatility. bitcoin is a volatile asset, so vega gets a bigger vote in determining the option price.
rho shows the reaction of an option price to changes in interest rates.
bitcoin vs. bitcoin options
The relationship between bitcoin and bitcoin options can be compared to that between a mother and her son. Although both have the same DNA and share a number of physical / biological similarities, they are not from the same body, since the child is an extension of her mother. similarly, bitcoin options can be perceived as an extension of bitcoin.
We already know why btc is selling and is currently the largest cryptocurrency by market capitalization: high demand. however, bitcoin options (and other derivatives) are sold because they serve certain specific purposes, which we will explore in detail below.
Hedging is one of the most common reasons for trading futures or contract options.
To understand coverage, imagine a garden near a river or waterway. it is safe to assume that such a piece of land will sooner or later be washed away by the force of water currents. in such a situation, the owner of the land builds a fence or hedge around it to protect it from erosion.
This example is a close, albeit simplistic, representation of hedging in financial markets. investors (and bitcoin miners) have an asset whose value could be “eroded” or “erased” by the forces of supply and demand. An options contract “protects” the value of the underlying asset, in this case bitcoin, by “locking in” its value, i.e. the price at which bitcoin can be exchanged for money.
Traders and investors use contracts like options to express their short-term sentiments (bullish or bearish) about an asset.
To better understand this, remember that when you buy an asset, you generally believe that the asset will be more valuable in the future. When the asset shows a substantial increase in value, you can make a profit by selling a quantity of it.
What happens, though, when you think a bearish streak is imminent in the coming months? Although the price of the underlying asset may recover after a while, by buying a put option you would maximize your chances of making a profit.
the benefit of leverage
Here’s another reason bitcoin options are increasingly being traded on bitcoin itself: Trading an options contract gives you the benefit of controlling a transaction size larger than the amount of capital you used to start the trade. position. For example, for a relatively small premium of, say, $500 or $1,000, you can control a bitcoin that could be worth $20,000 or more.
expiration dates refer to the agreed date on which the contract option (the option to buy or sell) will be exercised. Please note that not all bitcoin options contracts can only be fulfilled on their expiration date; some can, in fact, be exercised before the expiration date. Next, let’s look at the two methods of contract fulfillment.
European-style option contracts
European-style option contracts bind the holder to honor only the terms of the agreement on the expiration date. even if a contract is in the money (itm), the holder cannot exercise his option until the stated date, by which time the fortunes of said contract may have reversed.
A European-style contract requires greater precision in speculation than its American counterpart. At the time of writing, the major bitcoin options trading platforms offer only European-style contracts.
American style option contracts
Option contracts designed in this way grant the holder the privilege of exercising the contract before the expiration date. If a contract is ITM, the holder can decide to use the trading option on it, thus making a profit.
The American way of doing things means that a much lower degree of precision in speculation is required. making a profit requires that the contract be valid at any time: between the date entered and the expiration date.
how to trade bitcoin options
bitcoin options are offered on various exchanges, which have different contract allocation methods. for example, on a cryptocurrency exchange, the options contract is held directly between the client and the exchange.
To enter a contract option, the user chooses the amount of bitcoin they want to trade in the options contract, thus determining the premium. since the trade takes place between the user and the exchange (using a computer program), if the value lost by the user were to exceed a threshold, the user would be liquidated to restrict losses, and the only money lost would be the premium .
On some other exchanges, a user “writes” a contract and expects their contract to be matched by another who orders to buy a contract with terms similar to the writer’s. The exchange regulates this trade and a fee is charged to ensure fairness.
at bybit, bitcoin options can be purchased via derivatives -> usdc options (see image above). for a step-by-step guide on how to do this, click here.
are bitcoin options a good investment?
For the bitcoin miner, options can keep their rewards at reasonable levels when carefully implemented. For the bitcoin investor, bitcoin options are a good way to speculate on the rise and fall of bitcoin. even if btc is bleeding red, you can make money like a real businessman.
For the investor who wants to “feel” the market with no previous experience with bitcoin or cryptocurrencies, don’t worry: there is an option (pun intended) for you in the form of bitcoin options contracts. (Editor’s note: Make sure you’re educated about the risks involved. Opt for options trading only if you’re comfortable with the level of risk.)
the goal of every trader and entrepreneur is to make a profit; no one intends to lose. Due to the sophisticated nature of economic systems, this goal is now more attainable than ever. With the growth of cryptocurrencies, bitcoin options have also gained popularity in recent years.
On the other hand, more ways to make money means more ways to lose money. Crypto options require caution and not (ideally) a “get rich quick” mentality. To maximize your profits, you’ll need a lot of patience, as well as the ability to spot opportunities and act quickly.
We hope this guide has helped you understand the basics of btc options. As long as you do your research and understand the risks, you’ll be ready to buy your first bitcoin option.
trade bitcoin options at bybit today