As many are gravitating toward cryptos, they are exploring Bitcoin Options Trading. This article is everything that you need to know about it.
Wall Street announced the Options trading for Bitcoin in October 2017. In December of the same year, the price of Bitcoin was roughly $20,000. Thus, the market was optimistic and gained popularity amongst crypto traders.
Since the inception of Options trading for Bitcoin on Wall Street, the outlook of crypto trading has changed.
So what makes trading in Bitcoins options so attractive?
Many regretted missing the Bitcoin bandwagon. When the price of Bitcoin was well within reach, most thought it was a waste of time and money. But when the price rose, the same people started to admire the potential it possessed.
Bitcoin and the crypto market saw considerable acceptance when the rest of the financial market was on the verge of collapse during the global lockdown period imposed by governments to restrict and contain the infamous Covid-19 outbreak.
If you missed the great opportunity of owning Bitcoin but wish to trade, then Bitcoin Options Trading is the key. The derivative offers the same inherent risk of exploiting the crypto market without owning Bitcoin.
Options are one of the newest instruments to be added to the cryptocurrency ecosystem. In their quest to become widely used, cryptocurrencies are adopting various financial procedures and instruments.
Contracts are the cornerstone of every financial market. Contracts are legally contractual agreements created to fulfill particular demands and purposes. Contracts are “financial instruments” in the financial markets, which refer to abstract tools used to produce a profit. Contracts are created to make a profit.
Options are one such tool that has been created to generate income. Options contracts, like other derivatives, track the underlying asset’s price, meaning that its value is heavily influenced by the price of other instruments (cash or derivatives). A financial instrument can be purchased or sold at a specified price on or before a specific future date under the terms of an option contract.
There are a few terminologies you need to get accustomed to before starting to trade Bitcoin Options.
Options Trading: In this agreement, the buyer and seller agree that the buyer will have the right to purchase Bitcoin Options on a specific date. Under no circumstances is the buyer obliged to purchase Bitcoin Options.
Underlying Asset: Underlying assets are the financial assets that serve as the foundation for a derivative’s price. Since the article is about trading Bitcoin Options, it is the underlying asset.
Lot size: It is the quantity of underlying assets purchased in a single deal. Multiple lot sizes may also be purchased.
Call Option: The term “Call Option” refers to when investors exercise their option to purchase.
Put Option: The term “Put Option” refers to when investors exercise their option to Sell.
Strike Price: The “Strike Price” is the price at which a contract is entered into in the future.
Spot Price: The “Spot Price” is the underlying asset’s value on the date the Contract expires.
Premium: A minimal price is necessary for the underlying asset while getting into an options trading contract.
Expiry Date: This is the date on which the Contract ends.
Working of trading Bitcoin Options:
Bitcoin Option’s value is derived from the value of the underlying currency or Bitcoin. Bitcoin Options trading is consequently dangerous, particularly for those with limited market knowledge. But as we shall see, it carries less risk than direct Bitcoin investments.
Exercising Call Options:
Here is an easy-to-understand example to show how call options function. Next, take a look at the trending $1,200 price of Bitcoin.
If you think the price of Bitcoin will increase, you can buy a call option for 10 Bitcoin with a $1,600 strike price and an expiry date one month from now. The call option grants your right to buy the coins at the strike price. In this instance, you have paid $1,600 to get the right to purchase ten bitcoins at that price over 30 days.
You purchase the option from a market. The premium, let’s suppose, is $100.
Exciting news Regarding Bitcoin, you were correct. The coins are sold for $1,800 each on the expiry date. For a total of $12,000, you have acquired the right to spend $1,200 on each of the ten Bitcoins, which is $18,000. Therefore, after deducting the €100 you spent to purchase the option, your profit on the 10 Bitcoin options contract is $6,000. The $5,900 is sent to your account by the exchange.
That is the main idea behind “call” choices. If the price of a Bitcoin climbs above the strike price, you profit.
You don’t pay $12,000 and receive 10 Bitcoin. Options are typically settled on a cash basis by exchanges that deal with crypto derivatives. They assume that after paying $1,200 for each of the ten bitcoins, you will sell them all at the current market price of $1,800. Your wallet receives the profit from the exchange. So Bitcoin is never genuinely yours.
You would decide not to exercise the option if the cost of a Bitcoin was $1,000 on the expiration date. Ten Bitcoin wouldn’t be bought at $1,200 apiece. Your losses are capped with Bitcoin options contracts. You would only lose the $100 you paid to buy the option if it expired without being used.
Exercising Put Options:
A “put” option, which offers you the chance to sell the asset at the strike price, could be bought if you anticipate a decline in the price of Bitcoin.
To sell 10 Bitcoin at a strike price of $900 in 30 days, for instance, you might pay $100 on a put option. If the price is $500 on the expiration date, your profit is equal to $3,900, or $400 per Bitcoin, less the $100 option premium. In a bear market for cryptocurrencies, that is a profitable strategy.
Your option to sell Bitcoin for $900 would be pointless if the cost of a Bitcoin increased to any amount above the $900 strike price. If you let the option lapse without exercising it, you would lose $100 (the option’s purchase price).
European and American Options
The trades that are discussed here are of a European type. At the option’s expiration date, the option is exercised (or terminated). Most cryptocurrency exchanges employ this system. However, a handful has adopted American-style options, which permit options to be exercised at any time before the expiration date. Unfortunately, American-style options require steely nerves since you will be tempted to cash out even if your profit could increase – or disappear – if you wait a day or a week. Because of this, trading options is a high-anxiety hobby.
The market for Bitcoin Options trading is still developing, and complicated products underpinned by blockchain technology are only now gaining traction. Concrete evidence supporting this claim is the lack of regulations. Cryptocurrencies do have the ability to change the financial industry, though entirely, and that is something we just cannot ignore.
In the crypto ecosystem, options trading is rapidly gaining prominence. With potential high-profit margins and calibrated risk, think about diversifying your portfolio with crypto alternatives.