Let’s take an example of the BTC market on December 17, 2019:
Let’s say we believe that the bearish trend of the BTC market that has lasted for the past few months will continue. Traders may go short as their primary trading strategy rather than going long. Although BTC short/medium term bias remains to the downside, there was still little evidence showing the November correction would be repeated at this point, and 6400 levels seem like good support for now.
How to trade with ATM (at-the-money) options?
As we expect a BTC short/medium downtrend, here is a simple strategy that we can execute in our OKEx options trading simulation:
1. Sell an ATM call option. The market on 17th is still weak, and the rebound is less than expected, so sell the option on the exercise day and earn the return.
2. Alternatively, we can buy an ATM put option. When the market today is still bearish, and a further downtrend is expected, the increase in the option’s intrinsic value will cover the decrease in the time value. The price of this option will increase accordingly. In this way, whether we sell it directly at a higher price or wait until the exercise day, we can gain from it.
What are ATM options?
At-the-money (ATM) means the option’s strike price is identical or very close to the price of the underlying asset, regardless of call or put.
Below is the OKEx options trading simulation page that shows the information of the ATM option, including:
Red box: The exercise date of options, meaning the contract expiry period. The exercise date shown on the screenshot is this Friday at 08:00 am (UTC)
Green Box: The name of the option. The 1st part refers to the underlying product of the option, ‘TBTCUSD’ means the virtual BTC used in trading simulation. In the live market, it will be BTCUSD, meaning Bitcoin. In the 2nd part, ‘191213’ refers to the exercise date — December 13, 2019. It is the same as the information provided in the red box. In the 3rd part, ‘7000’ refers to the strike price, which is used to compare with the underlying price and to calculate the yield and forced-liquidation price. In the 4th part, ‘C’(Call) means a call option. If it is P (Put), it means a put option.
Blue box: Order book. Similar to futures, the red part shows the sell price, the green part shows the buy price. The right side is the number of options.
Yellow Box: Metrics of options. The first row shows the most crucial part: spot index and mark price. The index directly affects the buy & sell price of the option. When calculating the return on the expiration date, you need to compare the index and the strike price in order to calculate your return and the market price of the BTC spot after forced-liquidation. Here, we should focus on the mark price. The mark price, calculated by the platform’s system algorithm, is a relatively fair options price that changes in real-time.
Why should we focus on the mark price?
We found that in the trading simulation market, there is a considerable spread between the market price and the mark price, meaning when an asset’s value is $5, the market price could go up to $15 when it gains hype. At this time, the best way to trade is to sell the asset at the market price instead of buying it.
Let’s take another example from the BTC market history.
Back to December 15th, we saw that the trading volume and momentum indicators were not strong, and the market would oscillate in the short term. We believe traders should not go long on Bitcoin unless its price broke above 7300.
How to trade with OTM (out-of-the-money) options?
If the market is weak and oscillate a lot, you may opt for one of these simple trading strategies :
1. Sell an OTM call option. If there is not much oscillation in the market (no vigorous price movement), sell the option on the exercise day and receive money.
2. Sell an OTM put option. If the price does not drop as much as expected, and the time value is being quickly consumed, the option price will be lower. Whether to buy the asset at a lower price to recover the loss, or to wait until the expiry date, when the value of option becomes zero, you can earn from it.
3. Here is a slightly advanced strategy: combine strategy 1 and 2. In this way, you may double the return without much risks.
What are OTM options?
For an OTM (out-of-the-money) call option, it means when the underlying price is lower than the strike price. For an OTM put option, it means the underlying price is higher than the strike price. Put simply, OTM options refer to the situation when the price is not high enough or low enough to meet the strike price.
Same as the above, on the OKEx options trading simulation page, it shows the information on the recent ATM options. To find the OTM options, click “All-Weekly” and it will show all options of the week:
At that time, the BTC price is around 7050. According to the definition, OTM call options are those whose strike prices are higher than 7000, and OTM put options are those whose strike prices are lower than 7000 (Because the option with a strike price of 7000 is closest to 7050, it is considered as an ATM option here), which are the two parts circled in red in the figure above.
So, which OTM option should you choose? Here is the tip: consider the leverage of options. First, click “List Settings” on the top right corner, then tick the “Leverage” checkbox and click confirm. You can see the leverage of each option on the page, as shown in the blue circle in the figure above.
Please be clear that options are different from futures and perpetual swap. Options trading does not involve leverage, and users cannot select the leverage level. It is just a rough value given by the system based on cost calculation.
If you look closer, you will find that for a call option, the larger the strike price, the higher the leverage — exceptions for the last few leverages that stay at 2000x as their prices are small.
The leverage allows you to consider other factors besides strike prices. You can also refer to the contracts’ leverage levels to consider the risks involved and how much funds you should put into an options trade.
Finally, please bear in mind that the leverage ratio is directly proportional to the risk involved — the higher the leverage ratio, the lower the probability of exercise. Although your input is smaller, the risk of losing all funds invested is higher accordingly as well.
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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