An option contract is an agreement between the seller and the buyer that gives the buyer the right to fulfill the terms of the contract at a specified time and price. So trading Bitcoin options involves entering into an agreement with buyers or sellers through an option contract.
An option contract is similar to a futures contract, except that it is a right rather than an obligation. An option is a contract usually derived from a futures or forward contract. Therefore, there are only limited losses in case the buyer of the option decides not to exercise his rights. However, the writer of an option runs an unlimited risk, because he is bound by the will of the buyer.
Types and types of options
Option contracts generally come in two forms:
- Purchase Option : It is an option to buy the underlying asset at a predetermined price on or before a certain date.
- Set an option: It is an option to sell the underlying asset at a predetermined price on or before a specified date.
Then there are generally two types of options:
- A variation on the American style: May be exercised at any time before the expiration date.
- A variation of the European style: Can only be exercised after the expiry date
Treaties with a European character
Currently, most options on the market are only available in European style. These include exchanges such as CME, Deribit, Okex, etc. Therefore, these contracts are not enforceable until they expire.
Bitcoin options trading
Bitcoin [BTC] options are currently traded on CME, Deribit, LedgerX, IQ Option, Quedex, Bakkt and Okex. These include CME, Bakkt and other regulated platforms in the US. The CME Group is the largest futures market in the world.
Most exchanges only offer the ability to buy options, but Okex has added option selling. In terms of risk, however, the sale of options is much closer to that of futures contracts. Sellers benefit from premiums paid by buyers of unexercised options.
Bitcoin options are usually the only derivative contracts offered on the exchange. Nonetheless, regulators, including the CFTC, have recently commented positively on trading Ethereum as a commodity.
Ethereum futures are traded on many exchanges, including Binance, Huobi, Okex and BitMEX. There are currently no option contracts available for these futures.
Deribat Exchange is one of the few exchanges that offers options on Ethereum. ETH-USD on Deribit consists of prices from Bitfinex, Gemini, Bitstamp, GDAX, Kraken and Itbit.
EthereumDerivative Option Contract Specifications
In addition, the Binance exchange and some other derivatives offer futures contracts on other crypto instruments such as XRP, Litecoin [LTC], Bitcoin Cash [BCH], etc. In the future, when there is enough distribution and these contracts are available on more exchanges, we will likely see options written on these cryptocurrencies.
How do you trade bitcoin options on deribit?
To understand how to trade options, you need to understand that it is simply a transaction that is decided for the future. The buyer and seller of the contract win/lose on the difference between the strike price (contract price) and the expiration price.
Moreover, it is similar to futures contracts and you may not be able to choose between the two. It is therefore necessary to understand how margin and premium work.
Understanding margin and markup
The provider or seller is the company that sells these calls and puts. The writer of the option has unlimited liability if the buyer exercises his options. Therefore, in this case, the seller pays a margin to the broker or clearing house.
The buyer of an option gets by his or her calls and puts a right, not a duty. To choose this option, the buyer must pay a premium to the author.
For example, look at the order book of the Deribit Exchange below, it shows the call and put prices (bid and ask columns).
Let’s say a call option (of 3 BTC) with a strike price of $4,000 (so $12,000 total) costs about $2,200. So if the price reaches $6,000 at expiration, the call buyer will receive a call on the 25th day. Expiration time buy cheaper bitcoins (about $6000, 2000X3 cheaper than the expiration price) for a premium of about $2200.Therefore, he will end up with a profit of $4800.
Start your trading journey with bicomber options today.
Calling and recording an option on the Deribit Exchange
How to make money with bitcoin options?
To understand an option contract, one must understand the premium and margin. The buyer of an option pays a premium to sell or buy a certain amount of bitcoins at a certain time, on a certain date.
- The buyer of a call or put option only pays the premium.
- However, the seller of a put or call option pays a margin based on the strike price and the market price. However, if the difference between the strike price and the expiration price is insignificant, the seller makes a profit on the premiums.
Note that the buyer only benefits if the odds in his favor are greater than the premium paid for the option.
Therefore, the premium rate for a given strike price is an important indicator that can also help understand market sentiment.
For example, if we assume that the premium of a bitcoin call option is high, it means that traders are bullish. On the other hand, if the premium of a bitcoin put option is high at a given strike price, it means that traders are heavily betting that the price will fall below that price at expiration.
Risk management Who wants to buy and exercise options on bitcoins?
Futures and options were originally created to protect or hedge the losses of companies depending on the assets they trade or produce. Nevertheless, they are used in today’s market as speculative instruments, often highly leveraged.
A leverage of 10x-100x means that some of these derivative contracts allow a trader to bet 100 bitcoins with just 1 BTC. Nevertheless, the risks of leveraged contracts are no less. It mainly borrows money from liquidity providers to speculate on assets.
Difference between miners’ and speculators’ positions in bitcoin option transactions
In general, a miner with an equal amount of assets, say 100 BTC at the end of September, will likely lock in their bitcoins at a fixed maximum price to avoid losses due to the decline.
Therefore, the mine operator can sell the futures at the current price. So if the price falls below the current price, a profit is made on the difference between the expiration price. This makes up for the loss he suffered with 100 bitcoins.
The options market raises the stakes for miners, the buyer of a put option at a higher strike price can make a profit in a downturn. However, if the price is higher than the strike price, he will decide not to exercise his options and will benefit from the newly generated 100 bitcoins. Thus, by using options, miners are protected from losses and also have the opportunity to make money by exercising the option as they see fit.
Companies managing digital assets are also likely to buy futures and options to hedge their assets and increase their company’s liquidity.
Traders are more likely to buy futures contracts because the funding price is much lower than the option premium.
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