Bitcoin has seen a near parabolic rise up to the $8400 level of resistance. So far, it has been plowing through resistance like a freight train, leaving many behind who are sidelined in cash.
Now, there are a couple of ways that one could seek to capitalize on this BTCUSD upward movement- spot buys, longing futures contracts, perpetual swaps- these are the more common ways in which traders and investors could trade BTCUSD.
However, what if I told you that there is another method to capitalize on BTCUSD movement- and that is OPTIONS
What are options?
Options are a type of derivative, which simply means that it derives the price from something else. Thus, a Bitcoin option is a derivative that derives the price from Bitcoin itself!
Options are attractive because a buyer of calls/puts options enjoys limited downside and unlimited upside. I will go into detail on this later.
Where can I trade options?
Blue Helix Exchange recently offered options trading and offers a few products that you could choose from. Namely, they are- Bitcoin, Binance Coin (BNB), Huobi Token (HT), and OKEX utility token (OKB).
Blue Helix options contracts are weekly contracts, which opens on a Friday and expires the following Friday. A new option contract would then be available after the previous contract expires.
- In this screenshot, you can see a list of option contracts on the Blue Helix exchange.
- Take the first contract in this picture for example. BNB0517CS19 simply means that it is a Call Spread for BNB that is expiring on the 17th of May. This Call Spread has a strike price of $19. We will get into the concept of strike price later on.
- BNB0517PS19 is a Put Spread that expires on the 17th of May, and has a strike price of $19.
Note: Strike price is not always the same like in this example
Type of options- Calls and Puts
There are two types of options in which we will go over in basic detail.
- Call option
- Put option
- A call option gives the buyer the right but not the obligation to buy the underlying asset within a specific time period. Thus, buying a call option on Bitcoin is essentially the same as going long on Bitcoin.
Going long essentially means buying bitcoin, expecting prices to rise in the near future
- In the same vein, a put option gives the buyer the right but not the obligation to sell the underlying asset within a specific time period. Buying a put option is essentially the same as going short on Bitcoin.
Going short essentially means selling bitcoin, expecting prices to drop in the near future
- The premium is the price that you pay for buying calls or puts.
- The Strike Price of an options contract is the price at which an underlying asset can be bought or sold. Thus, if we refer to the picture above of the Bitcoin call option on Blue Helix Exchange, it has a strike price of $5500. In order to profit from this call option, the price of Bitcoin must go above $5500 in order for our call option to be in-the-money.
To simplify things when buying options
Here are some scenarios that a call spread(BTC0503CS5500) on Blue Helix Exchange could play out using a hypothetical price of $5100 per Bitcoin.
- Bitcoin rises to $5600. The strike price is $5500. The call option is $100 in-the-money, which means you will profit should you exercise the option or wait till it expires.
- Bitcoin rises to $5400. The strike price is $5500. The call option is $100 out-of-the-money and is considered worthless, in which you only lose the premium that you paid for.
- Bitcoin rises to $5500. The strike price is $5500. The call option is considered at-the-money and provides no opportunity for profits should you exercise the option or wait till it expires.
The opposite is true for a put option. We will use the put spread (BTC0503PS4900) on Blue Helix exchange for reference. Here are the likely scenarios that could happen.
- Bitcoin dips to $4800. The strike price is $4900. The put option is $100 in-the-money, which means that you will profit should you exercise the option or wait till it expires.
- Bitcoin dips to $5000. The strike price is $4900. The put option is $100 out-of-the-money and is considered worthless, in which you only lose the premium that you paid for.
- Bitcoin dips to $4900. The strike price is $4900. The put option is at-the-money and provides no opportunity for profits should you exercise the option or wait till it expires.
Now, we haven’t talked about selling options as it is inherently more risky especially for a beginner. Before I illustrate why it’s more risky, let me give you an analogy about selling options.
Imagine that you are life-insurance company. You sell insurance plans so that in any case people get hospitalized, they are insured and do not have to fork out a large sum of cash for their hospitalization fees.
Now, chances are that out of 1000 people, maybe 5 get hospitalized. More often that not, the insurance premiums that you have collected from 1000 of your customers can easily cover the fees of 5 of these hospitalizations. That’s how insurance companies make money.
As an options seller/writer, think of yourself as the insurance company but selling options instead of insurance. You’re selling the options to collect the premium that people pay when buying options.
Example of selling a call option
The basis of selling a call option is your belief that price will not trade/expire above the strike price of the option. Using previous examples above of a Bitcoin call spread(BTC0503CS5500), you believe/speculate that the price of Bitcoin will not go above the strike price of $5500. Thus, you are effectively collecting the premium that people pay to buy that call option.
- IF the price of Bitcoin remains at/below the strike price of $5500, you are safe and your profits are the premiums that you have collected.
- IF the price of Bitcoin goes above $5500 at expiry, that means that you have to pay (Price of contract at expiry-Price of contract you were selling at).
Where’s the risk?
Well, the risk of selling options is the potential for huge losses! This is especially true for someone who doesn’t know what they are doing, or have no planning done on their part. We will use the example above.
- Imagine selling the BTC0503CS5500 Call Spread, meaning that you believe that Bitcoin WILL NOT go above $5500. You sell the Call Spread at a price of $100 per contract.
- Price of Bitcoin shoots up towards $10,000 in two days. Now, you are suffering heavy losses since you lost $4500 per Bitcoin. The Call Spread expires at a price of $800 per contract. Thus, you would have to pay $700 to the contract buyer per contract.
- Something unique about BHEX options is that we have implemented a concept of ‘Max payoff’ for every pair. Max payoff simply means the maximum you can earn or lose PER CONTRACT. Thus, if you were the seller of Call Spread as mentioned above, you would only have to pay $500 as it is the max payoff amount that we have set for the Bitcoin Call Spreads.
NOTE: All numbers and figures are just an example and should not represent the actual calculation of contract pricing in the real world.
With all the information I have provided, I hope you gain some basic understanding of options and how to trade them. This guide is targeted at beginners who are curious and want to trade options. I will appreciate if you leave some claps on the article, and would be happy to answer any questions pertaining to this article. Happy Trading!
Written by: Meredith, Blue Helix Community Manager. Forex and Cryptocurrency trader.
About Blue Helix
Blue Helix is founded by James Ju, a successful serial entrepreneur — he was the CTO of Huobi Global in the year 2014–2017, and Vice President of X-Financial (NYSE listed Company) thereafter. He founded Blue Helix in early 2018 and it has completed $15 million USD in its angel round financing and have received investment from a total of 56 institutional investors including top exchanges like Huobi and OKex. Blue Helix is an innovative crypto assets financial services provider. The in-house developed Bluehelix decentralized blockchain-based assets custody and clearing system is dedicated to providing world-class professional financial trading and assets management services to worldwide users. It has its self-managed Blue Helix Exchange (BHEX.com) and Open SaaS Platforms for institutional partners (BHOP).
About Bluehelix Chain
Bluehelix is a decentralized digital asset custody and clearing technology. Based on blockchain technology and community consensus, it uses cryptography and blockchain technology to support decentralized governance capabilities at the technical level. Through the BHPOS consensus mechanism, the digital asset custody and transaction clearing are jointly supervised and managed by the community through- the consensus mechanism of transaction data on-chain; hot and cold wallet separation; multi-signature + member nodes clearing- the goal of asset security and transaction credibility is achieved. All of these effectively solves the security and trust problems faced by the centralized digital asset management platforms.
About Blue Helix Open Platform
BHOP is based on Bluehelix’s decentralized digital assets custody and clearing technology along with BHEX’s underlying trading technology. It combines the core competitiveness of Bluehelix and BHEX to create an open SaaS platform with key advantages such as asset security, transaction reliability, and horizontal performance expansion. This can help in providing technical and operational services to partners who have or are preparing to operate the blockchain asset trading business. Through the capabilities of the BHOP open SaaS platform, partners can quickly launch their own business at zero cost, and also achieve full control of customers, data, brands and technology. Partners with technical research and development capabilities will achieve deep customization of products through BHOP authorized source code. BHOP can fully satisfy individualized transactions of different industries and different types of blockchain assets. The needs of the platform can effectively help partners create unique competitive advantages.