FxBrokerReviews.org – Trading cryptocurrency options may be challenging, particularly in the world of derivatives. However, this derivative is a potent tool for traders trying to manage risk on a long or short bet.
You can purchase cryptocurrency options if you don’t want to buy and trade cryptocurrencies. Likewise, in futures trading, you can use leverage to depend on rising or falling prices or hedge your portfolio. The 5 Best Crypto Options Trading Platforms for 2022 are covered in this post.
The high volatility of cryptocurrencies discourages many investors from trading them. Trading cryptocurrencies, however, might offer significantly larger returns than conventional investments if you can time the market correctly.
The need for sophisticated trading tools increases as the cryptocurrency industry grows. Long a mainstay of conventional finance, options trading is now finding its way into the world of Bitcoin and other cryptocurrencies.
What Are Crypto Options?
A type of financial derivative known as a cryptocurrency option gives you the right, but not the responsibility, to buy or sell a cryptocurrency at a special price on a specific expiration date (the strike price). You pay an additional amount to purchase an option, which is typically less expensive than buying cryptocurrencies outright.
The right, but not the responsibility, to buy or sell an underlying property at a predetermined price at (or, in some instances, before) an expiration date is granted to the buyer of an “option,” a particular sort of derivative contract. A “put” option is a right to sell the underlying security, and a “call” option is a right to acquire it.
Unlike purchasing bitcoin on a cryptocurrency exchange, you can speculate on the future path of the market price by using options. You can choose whether you think the price will go up or down.
A stock or cryptocurrency option is a contract that provides you the choice to buy or sell an asset at a specific price without putting you under any obligation to do so. European options can only be executed on a particular expiration date, whereas American options grant that right during a specific duration.
- Call option agreement: The purchase-right
- Put option agreement: the power to purchase
Investors purchase and sell these contracts on an open market through options trading. This kind of trading is essentially a means to lower risk because there is no obligation to buy or sell.
Not all options trades, however, include risk. With options trading techniques, you may either pay someone to assume the risk on your behalf or get rewarded for doing so. They also let you protect against potential losses while speculating on the price of an asset in the future.
Trading Options In Cryptocurrency Markets
One of the top markets for crypto options is Bit.com. They draw institutional and retail investors and provide alternatives to BTC, ETH, and BCH.
The most common option pair combinations thus far are BTC and ETH. In 2021, Bit.com pioneered BCH pairs, and in 2022, Deribit unveiled SOL pairs. According to proponents of cryptocurrency options, the market should accept more commonplace pairs to offer a wide range of hedging and investment opportunities.
What Separates Cryptocurrency Options From Regular Markets
Trading in cryptocurrency and stock options has a few slight distinctions. First, with exception of stock markets, which are closed on weekends and weekdays at 4 p.m. EST, crypto exchanges are open around-the-clock.
The premiums are another distinction. Crypto options can be expensive because implied volatility is crucial for determining option pricing. On the other hand, greater volatility may result in more significant financial gain. On a trade worth $638,400 that took place in 2020, one trader made a paper profit of more than $4 million.
Explanation Of Calls
A call option is a legal agreement that grants you the right to purchase a digital asset at a specific cost.
Let’s imagine BTC is currently priced at $30,000, but you predict it will rise in the coming month. You could purchase a call option for one bitcoin on Bit.com with a $35,000 strike price. The contract’s expiration date is at the end of the month, and the premium is $400. Imagine that the cost of Bitcoin increased to $37,000. You will purchase Bitcoin at a discount of $1,600 if you exercise your call option (BTC’s price minus the strike price less your option premium). Unless you additionally sold BTC for $37,000, you wouldn’t make $1,600.
Nonetheless, you would only forfeit your $400 premium if the price of bitcoin fell short of the strike price of $35,000.
Remember that you would have to wait until the option’s expiry date if you used European options. This restricts flexibility. Thus European options often come at a lesser premium.
The opposite of a call option is a put option. It’s a legal agreement granting you the right to market a digital product for a specified fee and for a specific time.
If they anticipate a price decline, traders frequently purchase put options. For instance, if you had predicted that bitcoin would decline to around $25,000, you could have bought a put option for 1 BTC with a $30,000 strike price. With this action, you would have the choice to sell bitcoin for $30,000, less the premium cost. Only at the expiry date would you have the opportunity to use a European option.
The market for bitcoin options is less diverse than the market for options on conventional securities because they are a more recent development. We’ll examine five such exchanges that let users trade cryptocurrency options below.
For the time being, traders can use Bit.com to trade options like BTC, ETH, and BCH. Bit.com is one of the top exchange platforms for ETH and BTC options in terms of the trading volume.
Additionally, Bit.com offers a particular function called the Unified Margin (UM) mechanism. Thanks to Unified Margin, trades can be made with one account without restrictions.
A unified Margin is an improved trading and risk management approach that uses a single account solution to handle spot, borrowed, permanent, futures, and options as efficiently as possible. All secured cryptocurrencies in a single account are shared as USDT-denominated premiums to increase capital use and reduce liquidation risk.
A variety of web browsers can access the web-based Bit.com trading platform. Because there is no need to download additional programs, the podium greatly values user experience. As a result, traders are free to access their accounts and conduct trading from any nearby device.
The platform provides all necessary features and functionalities, with Tier 2 market data, robust trading restrictions, and technical analysis tools being the most crucial.
The availability of apps for both Android and iOS gives mobile traders additional reasons to cheer. All of the essential functions that a trader would require for trading are present in mobile apps.
The maker fee on Bit.com starts at 0.0200%, and the taker fee starts at 0.0300%. There are seven different fee tiers in total.
Deribit has been providing the cryptocurrency world with its crypto options products since 2016 and is situated in Amsterdam, Netherlands.
Deribit offers options that are European in style, which means that they can only be executed on the date of expiry. Additionally, cash is used for settlement rather than the underlying asset.
Last but not least, Deribit currently allows for trading options involving Ethereum and Bitcoin on its platform, with buying costs of 0.04% of the underlying or 0.0004 BTC or ETH per options transaction.
Also read: 8 Best App To Trade Crypto In 2022
3. FTX Exchange
The US Commodity Futures Trading Commission oversees FTX Market Derivatives, a clearinghouse and futures exchange for digital currencies (CFTC).
In addition to providing physical settlement of all contracts, block trading and algorithmic trading possibilities for investment firms, and immediate access for all traders, FTX Exchange Derivatives is accessible to retail and institutional investors. FTX US Derivatives has approved more than 10 million options and swapped contracts since its start in 2017.
Only European-style Bitcoin options, which cannot be exercised early, are available for trading on FTX. All options are settled in cash in US dollars on the expiration date.
The trading commissions on the platform are broken down into six categories, with maker commissions ranging from 0.020 to 0.000% and taker commissions from 0.070 to 0.040%.
One of the top options trading platforms available today is OKeX, formerly known as OKX, and was created for more experienced traders. Similar to Bit.com, OKX provides Unified Margin (Unified Account).
While OKX is appropriate for expert traders, it is also user-friendly and has emerged as one of the best crypto options platforms for traders looking to break into the market.
OKX is one of the most sought-after platforms due to the large variety of assets available for trading and the low costs.
A 0.15% maker charge and a 0.2% taker fee are the highest trading costs that low-volume accounts are subject to paying. For makers’ and takers’ fees, this falls to 0.02% and 0.05%, respectively.
The world’s most popular cryptocurrency trading platform, Binance, provides trading in various crypto assets. In both the spot and futures markets, it has the most stable market for all commodities.
Through its 2020-launched Binance Futures platform, the company lets you buy cryptocurrency options. To trade cryptocurrency futures and options, you can use the leverage of up to 125X.
Vanilla European-style Bitcoin options, which can only be executed on the contract expiry date, are available for purchasing and selling on Binance. The option contracts’ settlement and price are both in USDT.
The transaction fee and the fee to exercise are the two components of the options trading fee.
- Transaction cost: Index price * transaction charge, or 0.03% of the worth of the underlying asset
- Exercise fee: Exercise price * Fee to exercise rate, or 0.015 percent of the worth of the underlying asset
In both the transaction charge and the exercise fee, the fee cannot be greater than 10% of the profit realized by executing the option.
Trading Techniques For Cryptocurrencies
Your performance in options will depend on your approach. Here is a couple.
Call Options: When there are strong bull tendencies and prices are rising, purchasing a call option can help you reduce your risk to just the cost of the contract premium if the price doesn’t grow as projected.
Put Options: People who already own cryptocurrency face uncertainty and lack confidence when the market declines. However, put options can still turn a profit during a bear market. Purchasing a put contract guarantees you can execute a sale at your specified price as the price declines.
Selling Causes A Correction In The Market:
You have certainly seen #buythedip if you have spent time on cryptocurrency Twitter. It is a well-known long trading approach. If a trader is long an asset, they will take advantage of price drops to add to their position.
Because they offer lower prices on the assets they are long on, these traders frequently view bear markets as “buy the dip” opportunities. However, when traders directly purchase assets they feel are in the correction area, they risk “catching knives.” When a trader buys a dip, but the price keeps dropping below the correction area into a more prolonged or persistent bearish trend, it is called “catching knives.”
Traders who anticipate a correction in the price of a digital asset will sell put investment products to those who expect a further decline in price to protect themselves from catching knives.
Let’s imagine BTC is at $30,000 as an illustration. You think it might fall a little more to $25,000, but it’s still a long-term investment. By the end of the month, trader B predicts that the price will fall to $20,000.
As a result, you sell a put with a strike price of $24,500 (and a premium of $700) rather than waiting to buy at $25,000 Because waiting to purchase Bitcoin at $20,000 will allow them to sell Bitcoin (or exercise their option) at $24,500, Trader B will want to buy that put option.
Let’s say BTC reaches $25,000 and you decide to close out your investment or purchase BTC at that price. You earn $200 in premium profits (net of fee) if the price keeps falling and trader B uses their option to sell at 24,500. However, you gain from owning a long-term investment in BTC plus a $700 profit in premiums if the price declines and the option expires.
Options trading enables customers to insure against risk and enhance market equilibrium by presenting arbitrage opportunities. They are affordable because no upfront premium is required to issue an options contract. You do not have to come fully utilize the options under the agreement, which is another unspoken advantage. You have the option of choosing not to use the contract.