How does Crypto Options Trading work?

Crypto options offer experienced traders the ability to speculate on the volatility of cryptocurrencies and future price movements, as well as hedge their digital asset portfolios.

Crypto options trading allows traders to profit from the volatility in the crypto market by executing complex derivative trading strategies without actually owning crypto assets. This is an area of ​​crypto trading that has seen significant growth in recent years.

In this guide you will learn what options trading is in crypto and how it works.

What are Cryptocurrency Options?

Crypto options trading is an advanced trading strategy that gives a trader the right to buy or sell an asset at a predetermined price and date.

You are not buying or selling the actual cryptocurrency. Instead, you buy the option to do so in the future at a pre-agreed price. It’s like paying a fee for the right to make a trading decision later.

There are two types of options: call options and put options.

Call options give you the right (but not the obligation) to buy a cryptocurrency at a specific price before a certain date.
Put options give you the right (again, not the obligation) to sell a cryptocurrency at a specific price before an agreed date.

You can use crypto options to hedge a position in the market or to speculate on future price movements. Additionally, options allow you to place bets on market volatility by combining different options contracts within the same trade.

How does Crypto Options Trading work?

Crypto options work like traditional options in the stock and commodity markets. The only difference is that they have cryptocurrency as their underlying asset.

Now let’s take a look at the steps you need to take to trade a cryptocurrency option contract.

Choose the digital asset you want to trade on a centralized or decentralized crypto exchange that supports options.
Decide if you want to buy a call or a put.
Select an option contract to buy (or sell) based on the strike price, expiration date and premium.
To buy the option, you must pay a premium to the option seller. The premium may depend on a few factors, such as the current price of the cryptocurrency, strike price and time to expiration.
Once you have paid the premium (ie the price) for the option, you now own it.
You now have the choice between selling the option if the value of its premium increases or waiting to see if the option ends up “in the money” (that is, the price of the underlying goes above the strike price) before the option’s expiration date.

An example

Let’s say you think the price of BTC will rise from a current price of $25,000, and you decide to buy a call option, which gives you the right to buy BTC at a set price of $30,000 in one month. To secure this option, you pay a premium of $500.

Over the next few weeks, if BTC’s price rises to $40,000 and on the expiration date, you decide to exercise your call option. You can then buy BTC at the agreed price of $30,000, even though the market price is higher at $40,000. You can then sell it at the current market price and make a profit. But if the price has fallen or stayed below $30,000, you can choose not to exercise the option. In that case, you will only lose the $500 premium you have already paid.

Benefits and Risks of Trading Crypto Options

There are several pros and cons in trading crypto options, some of which are highlighted below.

Advantages

Crypto options trading is a way to speculate on the price of cryptocurrencies without owning the actual asset.
This allows traders to use leverage, meaning they can multiply their profits with relatively little upfront capital. However, it can also amplify losses.
Investors can use options as a type of insurance to hedge losses in their existing investment portfolios.

Disadvantages

Trading crypto options is a risky and complex strategy and can result in significant losses for inexperienced traders.
Although traders can use leverage to speculate on crypto prices, it can increase the risk of losses by a greater magnitude when the market does not move favorably.
Predicting the future is difficult, and speculating on the price of an asset within a specific time period is even more difficult. The expiration date in option trading means that if the market does not move as expected within the specified time frame, the option may expire worthless, resulting in a loss of the premium paid.

Popular Crypto Options Trading Platforms

There are numerous crypto options trading platforms available in today’s market. Three of the most popular include OKX, Deribit and Bybit.

OK is a global digital asset exchange that offers options trading on the two largest cryptocurrencies, BTC and ETH, among other trading offerings.

Deribit is a market-leading cryptocurrency derivatives trading platform that offers futures and options for BTC and ETH.

Bybit is another crypto exchange that supports options trading, offering options contracts that are collateralized with USDC, meaning traders must deposit or buy USDC on the exchange to start trading.

Crypto options offer several uses, including as a way to speculate on the future price of cryptocurrencies and hedging to reduce losses on an investment position. However, it is a complex trading approach that requires a deep understanding of how the instrument works and some trading experience. This means that it is essential for you to do your research before participating in crypto options trading on any platform.