The Capital
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The Capital

Understanding Bitcoin Options: Prices & Volatility

By Peter Jack on The Capital

Supporters of cryptocurrencies have been delighted by the launch of Bitcoin futures and Bitcoin options. But many are still not familiar with what these two actually mean. Bitcoin options are turning out to be a popular way to benefit from the volatility of the crypto-sphere by strategically confining some risks. To clear up all your confusion related to cryptocurrency options, here is a guide for you that explains everything about Bitcoin options.

What is Bitcoin Option?

Bitcoin option is a type of derivative contract that gives traders the right or option, but not the obligation, to buy or sell Bitcoin or any other cryptocurrency at a specific price and at a predetermined time in the future. Options give traders the benefit of generating income, making dicey bets and protecting their position in this volatile market.

Same as any other buying and selling contract, in the option contract also there is a seller and a buyer of the option. In this, the buyer pays an installment for the options contract which is set by different factors including moneyness (current price of asset vs specified price), expiry time and volatility. After this, the seller gets that installment as income.

When this option is applied to Bitcoin assets, many traders of the crypto world get huge benefits. For example, long term hodlers and miners can safeguard their position and earn by selling options. According to an analysis, options for a crypto asset improve the market quality of the underlying cryptocurrency.

What are Call and Put Options?

In Bitcoin, there are two types of options that are present. These are called ‘call’ and ‘put’ options. The call option gives the holder the right to buy Bitcoin or any other crypto coin at a predetermined price. The put option gives the trader the right to sell BTC or other digital currencies at a pre-decided price.

Calls and puts provide a raise for sellers and buyers with the option to invest by strategizing the risk and protecting their crypto portfolio. The buyer of a call option profits when the underlying crypto asset’s price is greater than the pre-specified price. And the buyer of a put option earns profit when the price of underlying crypto’s price is less than the pre-decided price.

Strategies for Trading Bitcoin Options?

Options are widely used for speculative investments. But the experts use options as a way to reduce risks and maximize their potential income through trading bitcoin. The actual power of options is not to be used alone, rather, in combinations. When combined, they can limit losses, increase earnings and create more predictable returns for the investor.

One of the most popular strategies for options is Covered Call. In this, traders have exposure to a cryptocurrency and are bullish for the long term but do not show a sign of having a significant increase in price in the near future. So, to allow the crypto to generate a return, traders sell the assets using the call option, and therefore, receive a return in the form of premium.

Similarly, there is another strategy known as ‘Protective Put’ to hedge a long-term investment. While Covered Call limits the upside on an investment when the asset is sold and call option is exercised, Protective Put helps limit the downside of a long-term investment and preserves the upside too. Here, traders buy a Put Option on a long-term investment for protection against losses and to have a limit on the upside that is equal only to the premium of the put.

For example, if an investor predicts a rally in the future and he has been increasing his exposure during the recent bear run, they may want to purchase a protective put of $200 at a strike price of $6500, hence limiting their downside.

Covered calls and protective puts are only the basic strategies of options. There are many other such as collar strategies, strangle strategies, butterfly strategies, straddle strategies, etc. All these strategies can be distinguished under market sentiments i.e. bullish, bearish, neutral and predictable volatility.

Where to Trade Bitcoin Options?

There are multiple platforms available in the market today that are having various pros and cons for trading Bitcoin Options like geographical locations, fees, user experiences, etc. These platforms include LedgerX, Deribit, Quedex, Bakkt, OKEx. Each of these has its own advantages and disadvantages and should be considered for trading based on the trader’s needs.

Overall, continuous progress and development in cryptocurrency’s financial infrastructure can be seen in the market. Traders can effectively use these instruments to improve their earnings and performance with bitcoin. Bitcoin options are essential for the digital assets’ market and also for the management of a trader’s position. Therefore, BTC options are a magnificent way to bet on BTC for the future with only a small amount of capital. So simply saying, BTC options has the potential of benefitting the entire crypto ecosystem, whether a particular person uses the assets or not.

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