Bitcoin options are financial instruments that allow investors to make leveraged bets or hedge their digital asset portfolios by speculating on the price of the digital currency. They are offered on both traditional derivatives exchanges and crypto trading platforms and have gained popularity among experienced crypto traders.
When trading Bitcoin options, it's crucial to find a trading venue that provides sufficient liquidity and high-level security. In this guide, we've put together the fundamentals that every option trader should be familiar with, presented in a structure that should address most of the questions that beginner option traders may have.
How to Buy and Sell Bitcoin Options
Bitcoin options are a type of financial derivative contract that grants the holder the right, but not the obligation, to purchase or sell a predetermined amount of Bitcoin at a specific future date. The market for cryptocurrency options is relatively new, but several traditional securities exchanges and cryptocurrency trading platforms offer options trading for Bitcoin and Ethereum.
In terms of technical functionality, cryptocurrency options operate similarly to options contracts for assets such as stocks, indexes, or commodities. However, crypto options tend to have lower liquidity compared to options for established stock indexes or commodities like gold. This can be attributed to the fact that the crypto market is still relatively small compared to traditional investment markets.
European vs. American
In the world of options contracts, there are primarily two types: European and American. The primary distinguishing factor between them is that European options are only exercisable at the time of expiration, whereas American options can be exercised at any point prior to the expiry date.
ITM vs. ATM vs. OTM
When dealing with options positions, there are three primary classifications: in the money, at the money, and out of the money.
If an option is considered in-the-money (ITM), this means that the current trading price of the underlying asset has exceeded (or fallen below, depending on whether it is a call or put option) the strike price of the option. In such a case, the option holder may be making a profit on their position.
On the other hand, if an option is out-of-the-money (OTM), this indicates that the trading price of the underlying asset has not surpassed the strike price, leading to a potential loss for the option holder.
Lastly, an at-the-money (ATM) option is one that is currently trading at or near its strike price, with neither a profit nor a loss being realized by the option holder at the present moment.
Calls vs. Put
When it comes to trading options for Bitcoin, you have the choice of either buying a call option or a put option. A call option provides the holder with the right to purchase the underlying asset, while a put option gives the holder the right to sell the underlying asset.
Your decision to buy or sell either a put option or a call option for Bitcoin will depend on your desired outcome, whether you are looking to speculate on a potential increase or decrease in price or if you wish to hedge your exposure to cryptocurrency.
Physical vs. Cash Settle
Options contracts can be settled in one of two ways: physically or cash-settled. For instance, if you are trading options for cocoa, you may have the option to receive actual shipments of cocoa when the options contract expires. However, since Bitcoin is not a physical asset, settlement of Bitcoin options can only be made in cash (i.e., in Bitcoin) or in Bitcoin futures if the options contract is based on Bitcoin futures.