Options trading in crypto will become huge, and for good reasons

Options trading has been around for at least a thousand years, and crypto is finally catching up to this financial instrument. There are already millions being traded, the returns are juicy, and it’s only the beginning.

For most, options trading is limited to the top financial dogs that know what they are doing.

Indeed, it may sound intimidating with all that complicated terminology: strike prices, puts, calls, straddles, etc.

DON’T LET THIS DETER YOU.

TRADING OPTIONS CAN BE VERY EASY AND VERY LOW RISK.

Let’s have a look at:

• What are options
• The benefits and risks
• My approach
• Why I use Synquote
• The terminology

I never provide any advice, financial or otherwise in any of my articles. This one is no different.

But first, a quick FYI: my good friend Everton got me into crypto options trading back in September 2022 and I will forever be grateful. I consider him my mentor and recommend following him on Twitter and reading his latest article which you will find here.

Everton also has an excellent course on options trading on Udemy. I learned a ton.

WHAT ARE OPTIONS?

Options are derivatives. Derivatives are financial assets whose value is calculated based on the value of other, underlying, financial assets.

In other words, options are pegged to a specific asset. They are used to speculate on where the price of that said asset may end up at a specific time.

Here’s an example with made-up numbers: in January a speculator offers a Canadian wheat farmer $1 per kilo of wheat for this year’s harvest. The farmer has no idea how the season will turn out, but he thinks the price is reasonable and it secures him a decent revenue (makes planning easier). The farmer accepts and signs a contract with the speculator.

This contract is what we call option.

Comes the harvest in August. The farmer sells his wheat to the speculator at $1, as per the contract/option. Speculator then sells the wheat on the open market.

• If wheat trades at $0.90, the speculator lost $0.10/kilo.
• If wheat trades at $1.10, the speculator made $0.10/kilo.

Basically, the speculator took a gamble on what the price of wheat would be this year.

The farmer secured a deal to sleep better at night, not having to worry should the price of wheat crash.

So far so good? Pretty logical.

In finance, options have a similar dynamic. Here’s another example with an added key concept: the liberty to use the option or not.

Today Bitcoin sits at $27,500. Let's suppose I believe Bitcoin will trade at $25,000 in 30 days. I can thus buy an option that gives me the right (but not the obligation) to sell Bitcoin at $27,000 in exactly 30 days. If I’m right and Bitcoin does trade at $25,000 after 30 days, I can use/apply/exercise my option and sell my Bitcoin to the poor bugger who sold me that option for $27,000. Yay!

In fact, if BTC trades at $26,999.99 I can still use my option. Doesn’t need to be at $25K, as long as it is UNDER the price we agreed upon.

But if I’m wrong and BTC ends up at $30K (or anything above $27K), I’ll simply ignore my option and move on. My loss will be the price I paid to purchase that option.

The person who sold me that option was essentially betting that BTC would trade at a price equal to or higher than $27K in 30 days.

BENEFITS AND RISKS

Options are traded for speculation and also for hedging portfolios. Big wallets are happy to buy options to protect their holdings. This way if the price crashes, they will use their right to sell at a higher price — OR — if the price skyrockets, they will use their right to buy at a lower price.

For the person buying an option, the risk is the commission paid. That money is gone forever. But that’s about it. No other risk. Easy to measure.

For the person selling an option, the risk is that if the buyer ends up using the option, you are forced into a bad trade. In crypto, when you sell an option, you deposit money (stablecoins) as collateral to represent the value of the position, and should the buyer use the option you sold them, the loss will be taken out of your deposit/collateral.

So up to the seller to calculate the risk. It can be very low or very high depending on the timeframe and gap between the price offered and the current price of the asset.

HOW IT WORKS IN CRYPTO

As I just mentioned, in crypto — or at least on the Synquote platform — you don’t need to deposit Bitcoin or Ethereum to sell BTC or ETH options. All is done using stablecoins.

Another benefit of crypto is the very short windows of time offered. You can choose options that expire in only a week! That makes it much easier to manage the high volatility.

Set a target for a week, then reassess and readjust.

Also, for the moment crypto only has European-style options, not American options. The difference: European options can be exercised only at expiration. American options can be exercised at any time prior to expiration.

MY APPROACH

As Everton taught me, it is much easier to predict where the price of Bitcoin or Ethereum will NOT be at a certain point in time as opposed to where the price will be.

The plan is simple:

• Sell options
• Collect commissions
• Repeat and compound

As you may have guessed, when you sell options, the further the agreed-upon price is away from the current price, the safer it is. Inversely, the closer that agreed-upon price is to the current price, the bigger the commission.

This agreed-upon price is called the strike price.

This means you have very good control over the risks you are taking. You want to push your luck? Go for it, but know that you may lose parts of your deposit. You want to play it safe? Choose a price miles away.

The Greeks

I have to point out what we call the Greeks, but I will be very quick because:

• Everton explains them well in his course, and
• I rarely use them!

The Greeks are indicators used to measure the risk, the volatility in the market, etc. Gamma and Delta are the two main ones I believe. For example, the lower the Delta, the safer selling that option becomes.

They are certainly helpful. I’m not denying that. And omitting them would be outright irresponsible (then again, as you know none of this here is financial advice).

On my end, I can already determine my risk simply by looking at the gap between the strike price and the current price. As for volatility, I follow the market on a daily basis so I have a good idea of what is going on.

I’ve been selling options for over 7 months now and my win rate is 100%. Of course, I go for very low-risk plays.

Perhaps that perfect win rate makes me cocky and I’ll hit a wall at one point and start digging more into the Greeks :-) We shall see.

EXPECTED RETURN ON INVESTMENT

Evidently, this depends on how risky you play it and how often you trade. A conservative estimate I have for my own trading is anywhere between 75% and 150% per annum. I’m dead serious.

THE BEAUTY OF SYNQUOTE

What is great with Synquote, is that the platform offers many strike prices to choose from. Let’s compare Lyra and Synquote to better illustrate.

Today on Lyra, the furthest strike price you have for Ethereum (ETH) is $1600.

At the time of writing, ETH trades at $1750. We all know that ETH can easily fill a $150 gap in a week….

On Synquote, you have much better strike prices for the same March 31 expiration date: $1500, $1400, or even $1300!

Oh and at the other end, where Lyra stops at $1950, Synquote goes all the way to $2300 (I could not scroll down and make it fit in the screenshot)!

Synquote’s mission is to give us retailers the same prices (commission) as what the big whales are getting. To achieve this, they manage what we call Requests for Quotes, but this is getting a bit technical.

IMPORTANT: I teamed up with Synquote, try to contribute to the platform in any way I can and I am a beta user.

TERMINOLOGY

I hope so far things make sense, but if you are like me, the best way to learn is through repetition, so give you the first example again, but this time using the terminology associated with options trading, including:

• Writing = selling. An options seller is an option writer
• Holding = buying. An options buyer is an option holder
• Call = gives the holder (aka buyer) the right to buy the asset for the strike price
• Put = gives the holder the right to sell the asset for the strike price
• Strike price = I gave you that one already :-) The price that would ‘trigger’ the option, or the line the price needs to cross for the option to be used
• Expiration or expiry date = the date when the holder can exercise his option
• Out of the money (OTM) = when the price has not yet reached the strike price; the option is worthless
• In the money (ITM) = when the price has crossed the strike price, making the option useful; it can be exercised/applied.

KEY NOTION AS A OPTIONS WRITER (SELLER):

If you think the price will go up, sell a put. Reasoning: you are giving someone the right to sell the asset to you, so you want the market to give that person a better price so they don’t come to you.

If you think the price will go down, sell a call. Reasoning: you are giving someone the right to buy the asset off you, so you want the market to give that person a cheaper price so they don’t come to you.

PREVIOUS EXAMPLE:

Today Bitcoin sits at $27,500. Let’s suppose I believe Bitcoin will trade at $25,000 in 30 days. I can thus hold (buy) a put option that gives me the right (but not the obligation) to sell Bitcoin at $27,000 in exactly 30 days. If I’m right and Bitcoin does trade at $25,000 after 30 days, my option will be ITM, or in the money. I can thus exercise my option and sell to the poor bugger who sold me that option my Bitcoin for $27,000. Yay!

But if I’m wrong and BTC ends up at $30K, it means my option expired worthless.

HERE IS MY FIRST TRADE ON THE NEW SYNQUOTE BETA

ETH-31MAR23–1400-P

ETH = the asset used, Ethereum

31MAR23 = the date

1400-P = A put with a $1400 strike price

Short (in red) = means I wrote (sold) the option

Entry price = the commission I received per contract

Voilà! If you fancy giving Synquote a go right now, you will need to be whitelisted; contact me here, on Twitter or come over the Discord.

I hope this article inspired you to look into options trading, which became a major part of my quest into passive income streams, the others being AstraBit trading bots and Minetopia NFT.