Crypto options trading allows traders to take advantage of the volatility in the crypto market by executing complex derivatives trading strategies without actually owning crypto assets. It’s an area of crypto trading that has experienced substantial growth in the past few years.
In this guide, you’ll learn what options trading is in crypto and how it works.
What Are Cryptocurrency Options?
Crypto options trading is an advanced trading strategy that gives a trader the right to buy or sell an asset at a pre-determined price and date.
You don’t buy or sell the actual cryptocurrency. Instead, you buy the option to do so at a pre-agreed price in the future. It’s like paying a fee for the right to make a trading decision later.
There are two types of options: call options and put options.
- Call options give you the right (but not the obligation) to buy a cryptocurrency at a specific price before a certain date.
- Put options give you the right (again, not the obligation) to sell a cryptocurrency at a specific price before an agreed date.
You can use crypto options to hedge a position in the market or to speculate on future price movements. Moreover, options allow you to place bets on market volatility by combining different options contracts within the same trade.
How Does Crypto Options Trading Work?
Crypto options work like traditional options in the equity and commodities markets. The only difference is that they have cryptocurrency as their underlying asset.
Now, let’s look at the steps you need to take to trade a cryptocurrency options contract.
- Choose the digital asset you want to trade on a centralized or decentralized crypto exchange that supports options.
- Decide whether you want to buy a call or a put.
- Pick an options contract you want to purchase (or sell) based on the strike price, expiration date, and premium.
- To purchase the option, you must pay a premium to the option seller. The premium can depend on a few factors, like the current price of the cryptocurrency, strike price, and time until expiration.
- Once you have paid the premium (i.e., the price) for the option, you now own it.
- You now have the choice between selling the option if the value of its premium increases or waiting to see if the option ends up “in the money” (i.e., the price of the underlying goes above the strike price) before the option’s expiry date.
Let’s say you think the price of BTC will rise from a current price of $25,000, and you decide to buy a call option, giving you the right to buy BTC at a set price of $30,000 in one month. To secure this option, you pay a premium of $500.
Over the next few weeks, if BTC’s price rises to $40,000 and on the expiration date, you decide to exercise your call option. You can then purchase BTC at the agreed-upon price of $30,000, even though the market price is higher at $40,000. You can then sell it at the current market price and make a gain. But, if the price dropped or stayed below $30,000, you might choose not to exercise the option. In that case, you would only lose the $500 premium you already paid.
Benefits And Risks of Crypto Options Trading
There are several pros and cons in crypto options trading, some of which are highlighted below.
- Crypto options trading is a way to speculate on the price of cryptocurrencies without owning the actual asset.
- It allows traders to use leverage, which means they can multiply their gains with relatively little upfront capital. However, it can also amplify losses.
- Investors can use options as a type of insurance to hedge losses in their existing investment portfolios.
- Crypto options trading is a risky and complex strategy and can result in significant losses for inexperienced traders.
- Though traders can use leverage to speculate on crypto prices, it can increase the risk of losses by a larger magnitude when the market doesn’t move favorably.
- It’s difficult to predict the future, and speculating about the price of an asset within a specific period is even harder. The expiration date in options trading means if the market doesn’t move as expected within the specified time frame, the option may expire worthless, resulting in a loss of the premium paid.
Popular Crypto Options Trading Platforms
There are numerous crypto options trading platforms available in today’s market. Three of the most popular include OKX, Deribit, and Bybit.
OKX is a global digital asset exchange that offers options trading on the two biggest cryptocurrencies, BTC and ETH, among other trading offerings.
Deribit is a market-leading cryptocurrency derivatives trading platform that provides futures and options trading for BTC and ETH.
Bybit is another crypto exchange that supports options trading, offering options contracts that are collateralized with USDC, which means traders need to either deposit or buy USDC on the exchange to start trading.
Crypto options offer several uses, including as a way to speculate on the future price of cryptocurrencies and hedge to reduce losses on an investment position. However, it’s a complex trading approach that requires a deep understanding of how the instrument works and some trading experience. This means that it is vital for you to do your research before participating in crypto options trading on any platform.