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Have you ever tried explaining to someone how Bitcoin works? It’s no simple feat.

Bitcoin is very confusing at first — it’s a strange, new, bizarre territory which doesn’t really compare to anything before it. It’s unchartered territory.

Eventually, it gets easier to comprehend, until you hear of Bitcoin options. At that point, the cyclical process of confusion starts all over again.

This guide aims to clarify what Bitcoin options are, how they’re traded, where they’re regulated, and which platforms facilitate their trading.

What you’ll learn

  • The Rise of Bitcoin
  • The Importance of Options
  • What is an Options Contract?
  • Key Options Trading Terms
  • The Basics of Options Trading
  • Can You Trade Options on Bitcoin?
  • How Bitcoin Options Are Different
  • How to Trade Bitcoin Options
  • Options Trading Strategies
  • Where Can I Trade Bitcoin Options?

The Bitcoin Boom 💥

In the past few years, Bitcoin went from being seen as something that passive, non-committal couch potatoes traded for a donut on Reddit, to now being considered one of the must have commodities out there.

According to CoinDesk, the past five years has seen the Bitcoin market rise by a whopping 900% in total daily transactions, going from 33,800 to 335,000+. The increased popularity of cryptocurrencies has also, in turn, increased the popularity of the instruments used to trade it. There’s an increase in the amount of exchanges opening, and Bitcoin ETFs might just be on their way.

An increased number of exchanges are starting up, with Bitcoin futures launching in January. Bitcoin options, on the other hand, have been up and running for years now. And for those years, it was not regulated in the U.S. But a decision by the Commodity Futures Trading Commission (CFTC) in 2019 set this on the path to change.

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Bitcoin is widely regarded as the best performing asset in the history of finance.

But one tool that is already up and running is Bitcoin options. For years, Bitcoin options trading was not regulated in the U.S. but this looks set to change with a recent decision by the CFTC.

The sheer fact that cryptocurrency options are available on the market within a decade of crypto’s beginnings symbolizes significant diversification and commerce in the cryptocurrency sphere.

Most people only heard about cryptocurrency near the end of 2017 when it was making headlines for its highs, hitting new records each week. Cryptocurrency options, therefore, are another breakthrough in the progressive curve of Bitcoin, along with other cryptocurrencies. 

In this guide you will learn what options are, how Bitcoin options work, how they differ from other options, and where and how to trade them. First, let’s begin by looking at derivative contracts.

The Growth of Crypto and The Importance of Options 💸

After a rocky start, with a volatile, lawless and high rate of fraud, bitcoin has since attracted professional and institutional players around the globe. 

Today, every bank wants to implement blockchain technology in an effort to reduce costs and improve efficiency. In the U.S, the biggest financial institutions have opened bank accounts for some U.S based cryptocurrency exchanges, while governments around the globe are in the process of trying to understand and/or implement their own cryptocurrency with a backing from the concerned banks.

The point here is that cryptocurrency is now breaking through all of its initial hardships in finding its way. Improved regulation has done and is playing its part in keeping out the bad apples and maintaining a fair and integral environment.

🏆 Looking for platforms that facilitate CFD trading? Contracts for difference are becoming favored by a growing number of investors. Take a look at our report on the top CFD trading platforms to learn more.

The Rise of Crypto Derivatives 📈

Only last year, the New York Stock Exchange-backed company performed a landmark move when it entered the market with Bitcoin futures contracts.

As a whole, crypto has grown exponentially, and is now leading change, though there is still a long way to go. Today, the cryptocurrency market cap is only just under $300 billion. The global stock market in comparison is worth almost $100 trillion. Thus, we can see that cryptocurrency is still only a baby in the financial field.

The Importance of Options Trading ✅

Options play an important role in all of this because they enable traders to be more versatile and hedge against risk. Similar to futures, options contracts allow traders to buy or sell a certain amount of an underlying asset on a pre-agreed date. Unlike futures, options give traders the right, but not the obligation, to buy or sell on the specified date.

This is dependent on whether we’re talking about a “call” option or a “put” option. We will go into more detail below but briefly, the difference between them is that a call option allows the trader the right to buy an underlying asset, and a put option allows the trader the right to sell.

Given that these are only rights, and not obligations, traders generally feel more content with the idea, especially in volatile markets, such as crypto.

What Is an Options Contract? 📜

Options are a type of derivative. A derivative contract is an agreement on an underlying asset – a stock, bond, commodity, etc. Options are traded at a price that is dependent on how the asset performs.

In other words, options contracts give the buyer the right but not the obligation to buy or sell the underlying asset at an agreed price within a certain timeframe. Buying the options is called the call option, and selling the option is called the put option.

A derivative contract is typically viewed as a more complex financial instrument that can often scare investors away. Similar contracts to options have existed since as early as ancient Greek times as a means of speculation on that year’s olive harvest.

Not only in Greece, options have appeared across various cultures, including the 17th century Japanese Dojima Rice Exchange. Nowadays, options are a major contributor to the global derivatives market which currently stands at a cool $500 trillion, give or take.

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Options trading is complex – and requires a basic understanding prior to getting started.

While the term derivative contract typically conjures ideas of complicated financial instruments cooked up in Wall Street labs, contracts similar to options have been in use since at least ancient Greece. Their initial use involved speculation on the olive harvest, and they span across cultures, exemplified by the 17th century Japanese; Dojima Rice Exchange. Today, options contribute to a global derivatives market estimated to be over $500 trillion

Furthermore, option contracts that lack terms or special features are called vanilla. Option contracts that include specific terms, conditions, and instructions, are called exotic options.

Overall, option contracts offer holders adaptability, and are commonly used by hedgers and speculators. Beginner investors will find options a bit complicated as they can be perceived as so in comparison to spot trading. 

For this reason, options are not taken advantage of as much as they should be. So long as investors have a good understanding of them, options can help you pocket some serious profit, although you will need to potentially invest more in the underlying asset if it’s volatile. To make it as clear and simple as possible, we’ve created a list with the key terms you’ll need to know to trade cryptocurrency options.

Call 📞

If you expect prices to increase, then you can buy a call option. With this, you buy at the agreed strike price at a later date, even if it has risen.

Put 👇

If, however, you expect prices to fall, you can speculate on the cryptocurrency by purchasing a put option. With this, you can exercise your right to sell the cryptocurrency at the agreed strike price, even if prices have fall

Strike Price ⚾

This is the price the option holder can buy or sell the underlying asset, should they exercise their right to. When it comes to call options, it is said the trader is “in the money” if the underlying asset costs more than the strike price. Similarly, the trade will earn a profit if the spot price for the underlying asset is less than the strike price.

Premium 🪙

Holders pay this price to buy the option. This is calculated taking into account several factors, like volatility, expiry date, the spread between the strike price and the current price.

Maturity 🌱

This is the expiry date of the option. The expiry date is the last day that the option can be exercised before the right to buy or sell at the strike price is up.

Trade Date 📅

The trade date is the date the option order is executed, should the holder exercise the option.

Delivery Date ⏰

If the option is exercised, the delivery date is the date the option is delivered, or settled.

The Basics of Options: Calls and Puts, Buying and Writing 🛠️

Let’s dive a bit deeper into calls, puts, writers and buyers. All of these are the key components of options trading.

As we mentioned, options contracts exist in two forms (you guessed it) calls and puts. Calls give the buyer the right to buy an underlying asset at the strike price. 

Calls and puts offer the levers for buyers and writers of options so they can speculate and/or hedge their portfolio. In the simplest form, the buyer profits when the underlying asset price is higher than the strike price, and the buyer profits when the underlying price of the asset is more than the strike price.

Now that we’ve gone over that again, let’s take a closer dive into how the most popular options trading strategies work.

The Long Call: Buying a Call Option 👍

Buying a call option means a trader believes the price of the underlying asset will go up. Although one could buy the asset itself, this will also put them directly in the line of the asset’s risk; volatile assets make this an especially risky task.

However, a trader looking to buy a call has a capped risk of the premium price they pay to buy the option. With that, the profit potential is derived from how much the spot price goes over the strike price plus the premium. For example, let’s say the strike price is $1,000 and the premium is $100. Should the spot price reach 1,200, then the profit will be $100.

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Example of the form of a long call option

In addition to buying a call, traders also have the option to sell, or write, a put option. Selling a put option requires traders to agree on a strike price, should the buyer exercise their right to buy or sell. Should the spot price go higher than the strike price, buyers won’t sell, and the writer will make a profit.

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Form of the long put option

If traders are less aggressive (or bearish) on the asset, they might buy a put option which gives them the option to sell at the strike price. This way they won’t need to short the stock. The long call works the same way, offering limited risk. 

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Form of the long put option

Another option, should you think the price of an asset will go down, is to sell/write a call option. When doing this, an agreement is made between traders to sell the asset at the strike price should the buyer exercise their right to buy.

This strategy is similar to the short put, its aim is to accumulate the premium along with the option, as buyers decide not to exercise the option. This usually happens when the spot price is below the strike price. When the spot price is above the strike price, the writer sells the asset at a cheaper rate. Traders typically use this strategy within a covered call strategy.

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Form of a short call

Are There Options on Bitcoin Futures? 📝

Yes. Options on Bitcoin futures finally launched in January 2020 on the Chicago Mercantile Exchange (CME). Traders have been pleading for exchange-traded options on Bitcoin, and in the first quarter of this year, they arrived!

Options and futures are slightly different in that the owner has the right at the expiry date of the option to go long in the Bitcoin futures contract. The owner of a put option has the right to go short on the Bitcoin futures.

Similarly to Bitcoin options, these come at a high price, and are seriously expensive. Options on Bitcoin futures imply a significant amount of volatility.

🏅 Ready to start trading? After learning about options, the next step is to start trading with one of the top options trading platforms. Many offer a free demo account, so you can start practicing without any risk.

Can You Trade Options on Bitcoin? 🪙

So, what’s so special about options is that they are such a significant and long-standing part of the finance world. But – how do bitcoin options (BTC) work, how do bitcoin options differ from other options, what regulations will help protect and keep your money safe, and importantly, where can you trade bitcoin options?

From an individual investor’s point of view, options enable you to create an income, speculate, and hedge positions, especially during times of volatility – and the options market is an extremely volatile one! (We’ll get to that soon). Options contracts are made up of the seller, also known as the writer, and, of course, the buyer. The buyer will pay a premium price for the options contract.

The buyer pays a premium for the options contract determined by factors including moneyness (the current price of the asset vs the strike price) implied volatility and the expiry times. Once this has been determined the writer pockets the premium. 

When it comes to Bitcoin, the benefits are huge for a lot of players in the market; holders and miners taking a long-term position can hedge a position effectively and make an income selling options. In addition, they give speculators the safety net of a capped risk, while also having the benefits of getting upside exposure at a much cheaper price.

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Bitcoin options are more complex than trading crypto directly, but can have great benefits when mastered.

When we view the market overall, we can see that options show to be a key factor when it comes to the health of the market. According to analysis conducted by the Journal of Finance, options listings for an asset resulted in a reduction in the spread and an increase in trading volume, quoted depth, transaction size and trading frequency. 

As a whole, these results imply that option listings increase both the quality of the market and underlying stocks. In simpler terms, Bitcoin options can have a positive impact on the whole ecosystem, no matter whether an investor uses them or not.

Bitcoin Options Trading USA 🇺🇸

One tool that’s up and running already is Bitcoin options. For a long time, U.S traders had no protection from the Commodity Futures Trading Commission (CFTC)  when it came to regulations but this is all set to change.

On October 2, 2017, the CFTC released a statement approving LedgerX for clearing derivatives. In may 2019, digital currency platform LedgerX announced it had raised $11.4  million through Ledger Holdings, its parent company, with the hope that the CTFC would ultimately accept it, and it did.

Ledger CEO Paul Chou stated, “A U.S federally-regulated venue for derivative contracts settling in digital currencies opens the market to a much larger customer base”

That said, Bitcoin options are not for everyone. Trading them can be seriously volatile and really expensive.

Why Are Bitcoin Options So Expensive? 💵

A key difference with Bitcoin options trading is the cost. Bitcoin is so expensive because it is one of the most (arguably, the most) volatile assets currently on the market. This makes implied volatility (IV) an important tool when valuing options. When IV rises, the price of the option does too.

In February 2020, for example, after Bitcoin reached a cool 10,000 in February, as a result of a run up since December, Bitcoin options have plummeted again, confusing and frustrating investors all round. Most recently, Bitcoin made its way back to the highs, resting in 10,000, and analysts are debating whether to take advantage of its successes or leave Bitcoin alone altogether. 

Despite Bitcoin options notorious volatility, it has previously been named as a safe asset option, some financial experts now see this asset as a risk with the continuation of COVID19.

💡 Keep in mind: If you want to trade crypto but don’t want the hassle of options, you can just invest in Bitcoin directly.

How Bitcoin Options Differ from Other Options? 🤔

Bitcoin options are different from other options firstly because they are “European-style options.” This means that they can only be exercised on the expiry date. Options in the United States can be exercised anytime up until the expiry date.

However, the contract itself can still be bought or sold before the expiry date.

On top of that, stock-based options contracts are based in 100s, so you will have the right to buy or sell 100 shares of the underlying stock. 

The high cost of Bitcoin means that Bitcoin options are far higher than a typical options contract based on stocks. Options differ from stocks in many ways, especially since options contracts can reach tens of thousands of dollars.

💡 Considering alternatives? If you’re looking for something a bit more cost efficient, stock trading might be the way to go. Take a look at our report on the leading online stock brokers to get started.

How to Trade Bitcoin Options 🛠️

Bitcoin options are not any different to other standard call and put options where investors pay for the right, but not the obligation, to buy or sell a set amount of Bitcoins on a certain date.

As we mentioned above, not all Bitcoin options are the same. American-style Bitcoin options can be exercised at any time before the expiry date.

While investors can trade European options at any stage but can only be exercised upon expiry. When trading, knowing distinctions like these are key to your success, hence the reiteration.

Firstly, let’s look at how to buy Bitcoin options. Investors are advised to choose a reputable platform that offers traders protection, and good customer service, such as Xena Exchange. Investors will have the choice between a number of options, just choose the one that fits your investment needs best.

Once you’ve researched and chosen a Bitcoin options contract that meets your investment needs, you can buy call or put options at the premium price, often seen in BTC. How to settle can vary from exchange to exchange. 

The table below will give a summary of options from popular exchanges:

When trading Bitcoin options, it’s important to keep your eye on the option’s price, the maturity, and the strike price. Doing this will ensure focus on the right Bitcoin options.

So far, we’ll have mentioned a good few terms, like implied volatility and delta. If you plan to go ahead and buy an options contract, you will need to know at last the basics of options.

Options Trading Strategies: Profiting in Bear and Bull Markets 🎯

While options are used by many speculative investors, the key to success with this investment is to use them to mitigate risk and maximize potential earnings. Traders who can combine the basic options trades with long and short trades can, in time, create more complex strategies to help optimize their portfolio.

Options become most powerful not when used individually, but as a part of a bigger strategy. When combined, options can expose investors to a super-specific amount of risk, create predictable returns, and generate income.

As we highlighted above, a covered call is one of the most popular strategies. This strategy exposes investors to an asset, and is bullish but they don’t forecast a huge increase in the near term price.

In order to let the asset create a return, traders can write/sell the call option, and receive the premium. Another strategy similar to this is a Protective Put. A protective Put differs from a covered call in that it looks to limit downside while preserving the upside. 

For this, traders go long on a put option investment to hedge against potential losses, with a limited upside that will be no more than the price of the premium of the put. 

Protective puts and covered calls are just the tip of the ice-berg when it comes to options-strategies. On top of these exist strangle strategies, straddle strategies, collar strategies and butterfly strategies, to name a few. These can all be looked at in terms of the sentiment i.e. bullish or bearish, neutral, or volatility.

These stages of the market for Bitcoin options are likely to also create some arbitrage trading opportunities, if we consider the Put-Call Parity principle. This suggests that the difference between a put and call option with the same strike price and expiry and is the same as the difference in the current strike price and spot price, discounted to present values.

C – P = S – K * D

 = Call option value, P = Put option value, S = spot price, K = strike price, D = discount

Should this equation not hold true, an arbitrage opportunity exists to grab; particularly in the newer stages of options.

📈 Ever heard of binary options? Some investors prefer these to traditional options. Learn about this investment strategy in our comprehensive binary options trading guide.

Where Can I Trade Bitcoin Options? 💻

Popular Bitcoin trading venues include LedgerX, IQ Option, Deribit, Bakkt and, the latest addition, OKEx. They all have different benefits and flaws, restrictions, fees, and customer experience, and should be assessed on the basis of traders’ individual needs and goals.

Traders should check out the newest addition to the market, OKEx. This Bitcoin exchange enables traders to not only buy options, but to sell/write options too.

As mentioned in the options strategies above, writing options contracts can be a critical part to all levels of strategies, which means that OKEx Bitcoin options is sure to be an invaluable tool for your success. OKEx also host futures, spot, C2C, and options trading.

All in all, the crypto space is continuing to develop and progress for trading, and those who can take advantage of its benefits should see improved performance, once done right.

All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.

About the author

Tim Fries is the cofounder of The Tokenist. He has a B. Sc. in Mechanical Engineering from the University of Michigan, and an MBA from the University of Chicago Booth School of Business. Tim served as a Senior Associate on the investment team at RW Bairds US Private Equity division, and is also the co-founder of Protective Technologies Capital, an investment firms specializing in sensing, protection and control solutions.

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