What are Bitcoin Option and how does it work ?

Bitcoin options trading represents a new way of taking a position on this globally widespread cryptocurrency. Check out our guide to learn more about what Bitcoin options are and how they work.

According to data analysis of the blockchain, the daily transaction volume of Bitcoin (BTC) has increased by more than 420% in the last five years – from 59,344 in January 2015 to 309,070 in January 2020.1 As the demand for the cryptocurrency increases, so does the number of possibilities with the currency to act. The most recent addition to trading instruments are Bitcoin options.

How do bitcoin options work?

Bitcoin options are a form of financial derivative instrument that give you the right, but not the obligation, to buy or sell Bitcoin at a specific price – the so-called exercise price – on a specific expiration date. For buying an option, you pay a premium that is usually cheaper than buying the cryptocurrency directly.

In contrast to buying Bitcoin via a cryptocurrency exchange, you can use options to take a speculative position on the future development of the market price, that is, you speculate on whether the price will go up or down.

Bitcoin options were traded on cryptocurrency exchanges for a while, but were not regulated. Now bitcoin options are slowly being rolled out by some regulated institutions, although not every provider will have an offer. Hence, it is important that you check out where to trade bitcoin options.

Learn more about trading Bitcoin

Bitcoin options allow you to take advantage of the volatility of the cryptocurrency without actually having to own the underlying asset. As the Bitcoin market is known to be very volatile, this product was in great demand. The cryptocurrency became famous for its rally with a 1900% increase in value in 2017, followed by an 82% decrease in value in 2018.

Learn more about what options trading is

Bitcoin options trading basics

The terminology used in options trading is the same regardless of the specific market in which you are trading. But it is still important to familiarize yourself with the key concepts before trading Bitcoin options.

Hold and write options

There are two parties to an options contract: the “owner”, also known as the buyer, and the “writer”, also called the seller. This applies to both put and call options, which means that you can take a long or short position with either type of option.

When you hold an option, you pay a premium to acquire the right to buy or sell bitcoin. If you write an option against it, you are selling your decision-making power to the buyer. If the options contract is executed by the holder, you would have to keep your contract end. You would receive a premium for taking the risk of doing this.

Bitcoin purchase options

Purchasing a Bitcoin call option gives you the right to buy a specified amount of Bitcoin at a set price (the strike price) on or before the expiration date. However, you are not obliged to do so. If you think the market price will go up, purchase an option to buy.

If your prediction was correct and the market price has risen above the strike price of the bitcoin option, you can buy bitcoin at the predetermined price. How much the underlying Bitcoin price rises above the strike price affects how much profit you would make from the trade.

Conversely, if your prediction was wrong and the price of Bitcoin went down instead, you can let the options contract expire worthless and only lose the premium you paid to open the trade.

If you had opted for a bitcoin call option contract instead, you would have made an obligation to sell a certain number of bitcoins at the strike price at the time of maturity. You would do this if you think the underlying market price is going to fall or have little volatility.

However, if the market price were to rise and the buyer had exercised their put option, you would have to sell your Bitcoin and the profit you could make from your existing stake would be limited.

Bitcoin put options

Purchasing a put bitcoin option gives you the right to sell a specified amount of bitcoin at a set price on or before the expiration date. However, you are not obliged to do so. If you anticipated a drop in price in the market, you would buy a bitcoin put option.

If your prediction comes true and the Bitcoin price falls below your chosen strike price, you can sell your Bitcoin stake at a higher price above the new market value. How far the underlying Bitcoin price drops below the strike price affects how much profit you would make from the trade.

If, on the other hand, your prediction is wrong and the Bitcoin price rises, you can let the options contract expire and only lose the premium already paid.

If you were to choose an alternative to a bitcoin put option, you would be required to buy the bitcoin at a certain price on a certain date. You would do this when you think the underlying price will go up and when you are confident that you will acquire the asset at a later date.

However, should the market price go down and the buyer exercises the put option, you would have to buy the bitcoin at a potentially higher price.

The Greeks

The Greeks are terms used to describe the factors that affect the price of an option. You determine whether you have to pay more to open an options contract (or get more if you sell options).

Delta measures how sensitive the price of an option is to a one-point move in the underlying Bitcoin price

Gamma measures how much the bitcoin option delta moves for every single point move in the underlying bitcoin market

Theta measures how much the price of an option falls over time. A high theta bitcoin option is closer to its expiration date

Vega measures the sensitivity of the option to the implied volatility of the underlying Bitcoin market and how much the option premium changes for every 1% change in volatility. Since Bitcoin is a very volatile asset class, Vega has a significant impact on the pricing of options

Rho is how sensitive the price of an option is to changes in interest rates.

If you’re looking for a way to trade Bitcoin but are unfamiliar with options trading, CFD trading is the place to go. CFD trading gives you the ability to take a position at Bitcoin price without actually having to own the underlying cryptocurrency.

Binary Options

Binary options are special financial derivatives. With this type of option, professional investors can speculate on a price rise or a fall. Cash or Nothing – either the investor was correct with his decision and receives a profit or the entire stake is lost. The functional principle is simple and immediately understandable, even for those who are not on the stock exchange.

The number of binary options trading platforms is growing steadily and the offer can hardly be overlooked. They all promise high returns, quick profits, and attractive bonus programs.

Bitcoin trading options strategies

There are various strategies for Bitcoin options trading that you can implement depending on your trading motivation, regardless of whether you want to speculate on the Bitcoin price or hedge against a risk for an existing BTC stake.

A number of option strategies are available for speculative traders to exploit the volatility of options. For example, a straddle options strategy involves buying and selling an equal number of Bitcoin put and buy options at the same time with the same exercise price and expiration date.

The idea behind this is that winning one position offsets the loss in the other, so you make a net profit. That means you can take advantage of bitcoin’s volatility no matter which direction the market is headed. However, if the loss from one Bitcoin option is greater than the gains from the other option, you would have a net loss.

The most common option strategy to hedge an existing investment is a covered purchase option. This involves writing an option to buy for the same number of BTC that you already own. If the market price fell, the short call option would offset some of the losses on your BTC stake. If the market price rose, you would probably have to sell your stake, but you could book the option premium as a profit.