Bitcoin Options is a derivative product that is created on the asset, Bitcoin. These financial instruments are cryptocurrency derivatives that similar but more complex than that of Bitcoin Futures. They are great for making money if you understand them well and know how to use them to your advantage.
BTC options trading is a low-risk, high-reward trade. This is mainly because of these kinds of trades, you simply lose the “premium” paid for accessing the market. I’m going to walk you through the different basic and important things about Bitcoin options.
Bitcoin options are financial derivatives that are dictated by Bitcoin (BTC), which is the underlying asset in this case. To understand options, it is very important to know the following:
This is where bitcoin options trading becomes so attractive. You can speculate on the future price of a BTC options contract without having to purchase or sell it during trade. Instead of paying the entire price of bitcoin (the underlying asset), you simply pay a non-refundable security deposit called “premium”. Usually, the premium you’ve to pay is around 5-10% of the contract value.
Before paying the premium, you’re predicting whether Bitcoin will finish above or below the “strike price” of the options. An example will help you understand it better.
Suppose, the price of each Bitcoin is trading at US$41,300 and the strike price of the options contract is US$43,000. Now, suppose, you purchase 1 options contract with the strike price at US$43,000. If the price of Bitcoin (the underlying asset) at the time of that contract’s expiry is at US$44,000, you make a profit of US$1,000. If you held 10 options contract, you will make a profit of 10 x US$1,000 = US$10,000.
Bitcoin options contracts always come with an expiry date. The most common option contracts are for 3-months. However, weekly, monthly, or 6-months option contracts are also available. It is important to note that you can your options contracts before the date of expiry.
Suppose, you purchased 2 Bitcoin options contract of 3-months. Its strike price is US$45,000. The premium for each BTC options contract is US$2,500. As you purchased 2 options contract, you’ve to pay a total of US$5,000 as premium.
Now, suppose, at the time of expiry of the options contract, the price of each BTC becomes US$50,000. This means that you made a profit of US$5,000 per contract. So, your total profit for 2 options contracts is US$10,000 (US$5,000 profit per contract x 2 contracts). Now, you have to subtract the premium amount you paid. Therefore, your net profit will be US$10,000 - US$5,000 = US$5,000.
A bitcoin call option gives you the right (not the obligation) to buy Bitcoin (the underlying asset) at the exercised price at/within a specified time (say, 3 months). The value of a call option increases as the price of Bitcoin goes upwards. If you think that the price of BTC will increase, you should buy a call option.
A bitcoin put option gives you the right (not the obligation) to sell Bitcoin (the underlying asset) at the exercised price at/within a specified time (say, 3 months). The value of a put option increases as the price of Bitcoin goes downwards. If you think that the price of BTC will fall, you should buy a put option.
The price differential between a BTC Call Option contract and a BTC Put Option contract (having the same expiry date) is called the “spread”.
It is the price at which the market believes the Bitcoin price will close at the time of a certain option contract’s expiry. It is the market forces (and not the cryptocurrency exchange) that decides the strike price.
Suppose, the BTC price is hovering around US$42,000 currently. The strike price of BTC Call Options contracts for 1-month and 3-months are US$43,000 and US$45,000 respectively. Now, it is up to you to speculate what the price of each BTC will be after 1-month or 3-months.
Suppose, the price of each BTC after 1-month becomes US$45,000. If you bought a 1-month call contract of US$43,000 strike price, your profit at the time of expiry of the call options contract is US$2,000 per contract. If your speculation becomes wrong and the price of each BTC becomes US$42,500, you make a loss of US$500 per contract. Your total loss, in that case, will be US$500 per contract plus the premium amount.
When you are buying a Bitcoin options contract, you are not purchasing the contract in full. Instead, you are paying just a small percentage of the contract value (usually, 5-10%) and buying the right (not obligation) to buy or sell the options contract. This small percentage of the contract value is called premium.
Suppose, the value of each contract is 0.1 BTC and you are buying a BTC options contract with the strike price of US$45,000. If we consider that the premium amount per options contract is 5%, then the contract value will be:
(Value of Each Contract) x (5% of Option Contract’s Strike Price) = 0.1 x (5% of US$45,000) = 0.1 x 2,250 = 225.
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