Trading options on cryptocurrencies: learning about this new financial frontier

With the cryptocurrency market maturing, there are now many new financial toys to play with.

Cryptocurrency trading has grown by leaps and bounds over the past few years. In 2020, the market size was valued at the respectable amount of $1.49 billion. However, according to forecasts, this sector is expected to change scale and reach a price of $4.94 billion by 2030, with a compound annual growth rate (CAGR) of 12.8%.

As more and more investors have continued to make their way into this burgeoning space, a number of cryptocurrency-centric trading tools have emerged and grown in popularity. These tools allow users – just like in the traditional financial industry – to engage in various digital asset-centric trading activities seamlessly.

Cryptocurrency options: What are “option contracts”?

A stock option can be described as a financial offer that gives an investor the right to buy/sell a stock at a predetermined price and date. In terms of how these new tools are traded in the traditional industry, options are bought/sold in a time-limited setup, and that can be a minimum of one day or a maximum of two years.

Like other derivative tools (such as futures, credit default swaps, among others), stock options represent new financial contracts. They allow traders to speculate on the price of an underlying asset, allowing settlements to be made in lieu of various government currencies as well as cryptocurrencies.

Crypto options: what is it?

When a person buys an option, they have the right to trade the associated/underlying asset without being obligated to do so.

Simply put, crypto options trading works much the same way: an investor has to pay a premium to acquire the “right” to buy/sell an agreed amount of crypto (e.g. Bitcoin, Ethereum, etc. .) on an agreed date. The cost of an option is generally called a “premium”.

Types of options

As the business landscape has changed over the years, two styles of options emerged and entered the consciousness of the masses.

  • American style contracts : the investor has the right to exercise the option at any time, that is to say even before the expiry of the contract.
  • European style contracts : European contracts only allow their owners to exercise the contract after they have expired. That said, even though European-style options are only executable upon expiration, they can still be traded or liquidated at an earlier time by their owner.

It exists two types of option contracts : call options and put options.

  • The call option : it gives the investor the power to acquire the underlying asset at a predetermined price (also called “strike price”).
  • The put option : it gives the buyer the possibility of exchanging/selling an asset at a determined strike price.

An in-depth look at how crypto options work

Suppose the value of a bitcoin at the beginning of the year 2022 (say January 1) was $24,000, but Investor A is convinced that this figure will be much higher at the end of February . So he decides to buy 10 European-style call options at a fixed rate of $26,000 for a premium of 0.002 bitcoin per contract — and set to expire on, say, March 1.

Mathematically speaking, 0.002 bitcoin at $24,000 per coin equals $48 at the time Investor A decided to buy the aforementioned call options (10 x 68 = $480).

Now, each contract gives the investor the opportunity to acquire 0.1 BTC at a fixed sum of $26,000 per coin. Therefore, Investor 1 can potentially buy 1BTC for $26,000 when their contract expires.

That said, two scenarios can potentially unfold:

Case 1 : If at the time of expiration the value of BTC is $30,000, Investor A can execute his contract and make a fixed profit of $4,000 ($30,000 – $24,000 = $4,000 ), less the associated premium of $480.

Case 2 : If at the time of expiration, the value of BTC is for example $22,500 and investor A waives his call option, he loses the premium ($480) he had to pay.

Crypto Options: Where Can You Trade Them?

With the cryptocurrency market having matured considerably in recent years, an increasing number of investors have continued to seek out reputable exchanges to indulge their options trading urges. Here is a list of some platforms currently available on the market:

Bit.com

Launched by Asian digital asset giant Matrixport, a company that is headed by Chinese billionaire, cryptocurrency entrepreneur Jihan Wu. Bit.com is a highly successful derivatives exchange that offers its users a wide range of institution-friendly features like individuals. For example, the platform has a portfolio margin module that allows hedgers to accumulate quality premiums while minimizing their portfolio risk. It also allows block trading across all commodities through the use of quality derivatives brokers such as Paradigm and ACCX.

Trading options on cryptocurrencies: learning about this new financial frontier

Compared to other exchanges, bit.com offers its users an advanced trading tool called “Unified Margin” which, in its most basic sense, can be described as an improved trading and risk management system. It thus provides a single account solution to optimally trade options, spots, margin rates, perpetual bonds and futures.

To clarify configuration details, all collateral cryptocurrencies in the aforementioned unified account are shared as USDT-denominated margin rate, so as not only to improve the native capital utilization capabilities of the system, but also to reduce the risks associated with the global liquidation.

FTX

Another hugely popular cryptocurrency options trading platform, FTX is an exchange headed by Sam Bankman-Fried, an American entrepreneur who was recently hailed as the world’s youngest billionaire.

Trading options on cryptocurrencies: learning about this new financial frontier

FTX specializes in trading a variety of derivative and leveraged contracts, including (but not limited to) options contracts, various volatility offerings, spot markets, and more. In addition, each option call made by the user on the platform is backed by numerous security guarantees. Additionally, the FTX UI features a custom hot and cold storage wallet solution, and which requires the use of two-factor authentication (2FA) every time a transaction is facilitated.

From a more technical perspective, when using this crypto exchange, traders have the ability to design their own options contracts and request a direct quote. Once the investor has received an offer, they can choose to accept the transaction, reject the request or make a counter-offer.

deribitate

Widely regarded as one of the most popular crypto financial derivatives platforms in the world, Deribit’s position as a market leader has only grown in recent years. This is mainly because the platform offers its clients a range of financial tools, including futures, perpetual swaps, and options related to Bitcoin and Ethereum.

Trading options on cryptocurrencies: learning about this new financial frontier

The exchange has an extremely professional dashboard that allows users with diverse technical skills to trade options and futures seamlessly. Additionally, Deribit’s large liquidity pool, combined with its low latency rates (i.e. the time it takes to complete a specific trade), has helped increase its popularity among derivatives traders.

Finally, it should be noted that all options on Deribit can only be exercised upon expiration, with all contracts being “settled in cash“. Finally, each option on the platform is automatically settled upon expiry, i.e. any intrinsic value due is paid to the owner as “profit”.

OKX

OKX, formerly known as OKEx, is a popular cryptocurrency exchange that offers its users a range of features including options/spot/derivatives trading (among many others). The platform debuted in 2017 and has since continued to garner an increasing amount of traction from the public, thanks to its industry-leading liquidity.

Trading options on cryptocurrencies: learning about this new financial frontier

From a technical standpoint, OKX provides its clients with certain niche products designed to help beginners on their journey to options trading – while providing them with various price discovery benefits (i.e. i.e. allowing investors to find the best deals for themselves).

Finally, the platform also provides users with a wealth of technical data on global options markets, allowing them to identify and understand current financial trends in order to maximize their profits.

Disclaimer

All information on our website is published in good faith and for general information purposes only. Any action taken by the reader based on information found on our website is entirely at their own risk.

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