Options trading has been an integral part of traditional finance for a very long time, and now it is coming for Bitcoin and other cryptocurrencies.
I am talking about Bitcoin options trading.
I think you are already aware of it but are looking for more information on Bitcoin options trading.
If that’s the case, I must say you are in the right place.
Bitcoin and crypto options trading are catching up. Especially amongst people who have well-established crypto portfolios so that they can hedge the risk of their positions.
For doing such type of trading, one needs to find reliable Bitcoin and crypto options trading exchanges. I have found some of them as I want to hedge my portfolio risk, just like yours!
3 Crypto/Bitcoin Options Exchange: Trade (buy) Bitcoin Options?
Usually, people who get to know about options are generally confused about how and where to trade Bitcoin/crypto options?
That’s where we come in and now have made this curated list of best Bitcoin options trading exchanges from where you can quickly learn how to trade BTC options and also trade on them !!
Moreover, you should know that nor all crypto exchanges are created equal neither all exchanges offer Bitcoin options contracts for trading.
Bitcoin/crypto options exchange is still a niche business, and not many established players have entered this space. But whatever crypto options exchanges are available out there are suitable for the job.
So here are they:
Derbit is the most preferred Bitcoin and cryptocurrency options trading exchange.
It is based out of Amsterdam, Netherlands, and is serving the crypto community with its crypto options products since 2016.
Due to the less availability of crypto options, Derbit has become the go-to options exchange for many cryptocurrency traders who have well-established portfolios.
Further, Derbit provides European style options means such options can only be exercised at the time of expiration date. Also, the settlement happens in cash instead of the underlying asset, but this shouldn’t be a problem for anyone as it still does the job for you!
Lastly, as of now, Derbit facilitates options trading of Ethereum and Bitcoin on its platform where these fees are applicable 0.04% of underlying or 0.0004 BTC or ETH per option contract.
Quedex is another European style options trading platform that allows you to trade Bitcoin options and settle in cash.
The exchange itself has less liquidity but can be said decent in terms of options niche, and the exchange started serving the crypto markets only in December 2017.
Apart from that, Quedex is regulated entirely by Gibraltar Financial Services Commission and allows you to trade inverse options price at the nominal value of $1.
The fee charged for makers of liquidity is zero, and for takers, it chargers 0.03%, which is quite low. Furthermore, it allows you to trade in three types of options of different maturities i.e.
- weekly, expiring every Friday,
- monthly, expiring on last Friday of the month,
- quarterly, expiring on last Friday of March, June, September, and December.
LedgerX is a US-based exchange offering Bitcoin options, futures, and swaps since October 2017.
They were the first fully regulated exchange by the US Commodity Futures Trading Commission (CFTC) after a rigorous regulatory process of 3.5 years.
Initially, the exchange was only open for institutional and accredited investors, but recently they have opened doors for retail investors too.
But mind you, only the US customers can use this exchange after a rigorous KYC. So if you are someone who is in the US and has a portfolio of BTC to hedge your risk, LedgerX is the way to go.
What Is Bitcoin/Crypto Options Trading?
Options trading is not new, but I believe some of you might not be aware of its benefits.
So allow me to help you out.
Options are financial instruments that derive their value from other underlying assets. These assets can be stocks, bonds, indexes, or cryptocurrencies.
As the name suggests, Options trading gives an option or choice to the trader to buy or sell an asset in the future at a pre-agreed price irrespective of whatever the price of the asset is at the time expiry.
Complicated? Let me explain you with an example.
Let’s say you have a healthy-looking Bitcoin portfolio, and you are satisfied with it. But you are also aware of the volatility of the BTC market and are expecting a bear market.
You are skeptical of this impending bear market and are not sure whether your healthy-looking portfolio will continue to look healthy.
In this case, you would want to minimize the risk of your portfolio and would not want to lose the unrealized profits, especially if the bear market never ends.
Enter Bitcoin options for it.
You can purchase Put Options for Bitcoin. Put options are the financial instruments that will kind of lock the selling price for your bitcoins in the future. Having put options in such a case is like having portfolio insurance.
Such put options can be bought easily through a Bitcoin options exchange where you need to pay a small premium or fee to be able to purchase such put options.
Now, let say, you have 10 BTC, which you bought each worth of $10,000. You are expecting the price per BTC To hit $8000 in the future, so you have purchased 10 Bitcoin put options for $50 each for a future locked in price of $10,000 per BTC.
After some time, your skepticism comes true, and BTC price is bear for long and is lingering around $8000 (strike price), and you want to exit your position.
So, in this case, you can exercise your put options and still sell your Bitcoins for $10,000 per BTC.
In this scenario, you were able to realize all the profits from your BTC portfolio regardless of the market BTC price. Thanks to BTC, put options for it.
Also, notice you were able to exercise this put options because you had already paid a premium of $500, i.e. $50 per put option, which I think is a cool deal to hedge against your portfolio risk.
In case of not having a put option, you would have lost 20,000, i.e. $2000 per BTC because Bitcoin was later trading at $8000 mark.
So that way, you enjoy the insurance with Bitcoin put options.
But remember, the buyer is not obligated to do this in case the price of BTC shoots up in the future. That’s why it is called an option.
Still, for the seller of a put option, it is an obligation now to buy the underlying asset, i.e. BTC, in case the buyer decides to exercise his/her put option in a scenario of Bitcoin price downturn.
Some More Basics About Bitcoin Options
In general, there are two types of options, known as Puts & Calls.
Traders, hedgers, etc. use call option (right to buy) or Put option (right to sell) both. These are also called as options contracts and consists of broadly four essential components:
- Size: It means the size or the number of options contracts anyone needs to buy either calls or puts. Sometimes also referred to as the lot size
- Expiration Date: The date before which one can exercise the options contracts. After this day, the options expire, and the holder no longer enjoys the right to exercise the contract.
- Strike Price: It is the price at which the asset will be bought or sold if the actual price of the asset in the market hits it.
- Premiums: It is like a fee or the cost one pays to buy different kinds of options. When you pay a premium for call options, it means you are paying to exercise the right to buy under the expiration date. On the other hand, when you pay for put options, it means you are purchasing the right to sell an asset as per the expiry of the contract.
So using Bitcoin options, Bitcoin owners usually do these two types of trades:
Protective Put: It is buying put options for the bitcoins you already own. Buying this insures your BTC portfolio against the potential downturn. In case the downturn doesn’t happen, you only lose the premium you paid to purchase these puts.
Covered Call: In this case, too, you own the BTC and are sure of the price movements in the future. Using this situation, you can make extra income from your holdings.
So when the call options you are selling expires and strike price is not reached, you would have earned extra through the premiums of call options you sold.
On the other hand, if the strike price is reached and the buyer of the call option would want to exercise the contract, and as a seller, you would be obligated to sell your bitcoins.
Cryptocurrency options trading is still a niche, and no many cryptocurrency exchanges provide this service.
Partly the reason for this is the general low liquidity of options market. The liquidity is low because not many investors have established crypto or Bitcoin portfolios for which they would want to hedge their risk. That’s why the liquidity of BTC options is generally low because of the lack of demand itself.
As the market matures, options trading is going to become a thing, after all, who doesn’t want to mitigate their portfolio risk.