The growing interest in Bitcoin has increased individuals and business entities investing in derivative products like Options, Futures, Swaps, Forwards, and Perpetual Futures. While you can trade these financial products on any crypto exchange or trading platform, this article guides you on how to trade Bitcoin options.
Understanding Bitcoin Options
Bitcoin options are a type of derivatives contract that enables traders or investors to speculate or hedge Bitcoin price volatility without owning Bitcoin itself. This makes them one of the methods investors adopt to leverage the volatility of Bitcoin as it revolutionizes the crypto market.
An options contract allows a trader to buy or sell Bitcoin at a previously agreed time and date as each options contract has a price referred to as a “premium.” This premium must be paid irrespective of whether or not the investor proceeds to trade Bitcoin.
It should be noted that trading platforms may also charge service fees in addition to the premium.
Types Of Bitcoin Options
There are four (4) types of Bitcoin options, and these are:
- Call options: Enable a trader to purchase Bitcoin on a pre-agreed date.
- Put options: Enable a trader to sell Bitcoin on a pre-agreed date.
- European options: Allow a holder to use the options only at the expiration date.
- American options: Allow execution any time before the contract expiry date.
Terms To Understand Bitcoin Options Pricing
1. Call Options
A call option is when the market price of Bitcoin exceeds the option’s strike price. If the options are exercised, the holders may buy Bitcoin for less than its current market value.
2. Put Options
A put option takes place when the market price of Bitcoin is lower than the strike price of the option. It enables the option holder to sell Bitcoin at a price above the current market value, which can be profitable if the options is exercised.
How Bitcoin Options Work
Every options has an expiry date, and the contract must be executed on or before the expiry date, depending on the type of options contract.
For instance, if an investor buys Bitcoin call options at $40,000 and pays a premium of $600. If Bitcoin’s price falls to $35,000, the investor can decide not to use options, avoiding a $5,000 loss but forfeiting the $600 premium.
In another use case, suppose an investor purchases Bitcoin call options at $30,000, and the Bitcoin price later rises to $45,000. Here, the investor may exercise the options to make a $15,000 profit minus the premium and any additional fee.
Bitcoin Options Trading For Beginners
Options trading is characterized by complexity and risk. This includes the risks of buying and selling Bitcoin directly on a crypto exchange. As such, beginners in the crypto market must make direct trades on exchanges to understand the market dynamics before going deeper into the complex world of derivatives and options trading.
However, many platforms offer demo accounts for investors interested in exploring options. These accounts enable beginners to learn the fundamentals of options trading in a risk-free environment, using simulated funds instead of real capital.
How To Trade Bitcoin Options
Here are the steps for investors to buy or sell options after understanding how the derivatives and adopting a strategy for their risk tolerance:
- Choose your preferred crypto exchange or trading platform, considering available contracts, fees, security, etc.
- Sign up and complete the know-your-customer (KYC) process for identity verification as required by your preferred exchange or platform.
- Deposit funds in crypto or fiat currency, depending on the platform’s payment methods.
- Locate the options section on the platform to know the type of available options contracts.
- Select a “Call” or “Put” option based on the trading strategy, market analysis, and knowledge of options contracts, considering fundamentals like premium, strike price, and expiry date.
- Enter the details of your trade, like the size of the contract and the price you want to pay. You may have to review and confirm your order.
- Monitor the crypto market, contract, or position to stay up-to-date.
- Decide whether to exercise the options, hold it until expiry, or sell the options contract before the expiry date to close your position. This depends on your strategy and market conditions.
Bitcoin Options Strategies
Investors commonly use options to hedge the predicted Bitcoin price that can affect the general crypto market. This is a risk management strategy to offset potential investment losses.
For instance, an investor may purchase a put option to hedge against a potential drop in Bitcoin price. This option enables you to sell Bitcoin at a predetermined price, protecting you if the market price drops below this level.
Meanwhile, an optimistic investor can buy a call option, enabling you to purchase Bitcoin at a set price in the future, which earns you profit if the market price exceeds this level.
Frequently Asked Questions (FAQs) About Bitcoin Options
Which App Is Best For Bitcoin Options Trading?
You can buy or sell Bitcoin options on crypto exchanges like Binance, Coinbase, Bybit, OKX, and ?Kraken. Traditional derivatives trading platforms that offer assets like gold and silver also make options available for investors.
Are Bitcoin Options Risky?
Yes, it is risky to invest in options due to the volatile nature of Bitcoin, as it applies to cryptocurrencies like Ethereum, Litecoin, Dogecoin, etc.
Are Bitcoin Options Profitable?
Bitcoin options contracts can be profitable as traders or investors have the potential to earn significant profits due to the rapid price movements of Bitcoin.
How Are Bitcoin Options Taxed?
Bitcoin options are subject to capital gain tax when you close your position. This includes when you sell the options. Therefore, it is covered in the crypto tax in Canada and the formulation of crypto tax and regulations in Australia.
What Is The Difference Between Options And Futures?
Options contracts provide traders or investors with the right but not the obligation to buy or sell BTC at a predetermined price and date. On the other hand, Bitcoin futures allow traders to buy or sell Bitcoin at a predetermined price and a specified date.
Conclusion
Bitcoin options are one of the derivative products of Bitcoin that enables you to trade BTC without owning the crypto asset directly. This product is available on major crypto exchanges as it provides a way to make money, although it can be risky and complex.
Therefore, it is essential to understand the intricacies of options, as we have highlighted some points in this article. It will guide you to make a profitable trade while minimizing its risk.
