Let’s talk about bitcoin options 2021. The current crypto market sees the hype around bitcoin and its inderlying technology increasing, while the traditional cryptocurrency or digital currency markets suffer due to increased inflation rates. While the price of BTC has nearly tripled within 2020, curious investors are still somewhat cautious and confused.
Imagine if you had invested in Bitcoin in 2009, when Bitcoin was trading for less than $10. Even in 2017, BTC was trading at less than $1,000. It also reached an all-time high of over $20,000 in 2017! This may have been a missed opportunity for you!
At this point in time, we have a better idea of where Bitcoin is headed. Institutions are buying. Governments are printing.
Bitcoin options – What is a trading option?
Bitcoin options is a type of derivative trading that uses a contract to lock in a price for an asset – in this case BTC. The contract is literally an “option” to buy or sell the stock over a certain period of time, which is determined by the person writing the contract or the option when they go to buy or sell it on an exchange. This is very useful when a trader or the owner of a stock share want to limit their risk.
Here’s how the process works in the stock market, where such contracts have been used for decades:
Bitcoin put contracts
There are different types of contracts when it comes to BTC options trading. The most popular is bitcoin put options contracts. Here is how they work:
Let’s suppose for a second that you buy BTC at $10000 and it rises over a six month period to $15000. You want to make sure that you keep these gains, or that your coin doesn’t lose its value and head back down to $10000.
In this case, you might purchase an options contract to sell, or a “Put” contract, that gives you the right to sell over a certain period for $14500. That means you can sell the stock at this price over the contract period no matter what the actual market value of the stock is. It may go down to $14200 on the exchange, but you could still sell it at $14500 thanks to the contract you set.
Congratulations! By investing in a bitcoin put option you have successfully limited your risk or your losses. You may hear people refer to this process also as “puts” in the plural form. For example, you can “buy puts on Bitcoin” when you sense a bearish sentiment building up.
Bitcoin call contracts
If you sense that the market is headed towards the upside, you don’t need to buy put option Bitcoin. In this case, what you need is a call contract.
Call options are essentially the opposite of put options. They give you the option to buy Bitcoin or other assets at a set price over a specific period of time. Using our example above, you could purchase a call contract to buy Bitcoin at a price of $12000 over a period of time. This $12000 target price is known as the strike price.
Why would you want to do this? Most of the time, this type of option is best for those that want to hedge risk when shorting the market. If you “short” or bet against a stock, for example, and purchase 100 shares at $100, then your risk is theoretically unlimited, because the value of the stock has no cap.
Short sellers limit their risk by using call contracts to put a limit on the value of the stock for their trade. If the stock rises again to $150, they can still purchase it at $120, limiting the potential of losing out. In your case, you could also purchase a call contract to purchase a particular stock at a particular price on a particular day.
Option contract premiums
Why wouldn’t you always pair an options contract with a trade? Simply said, those that write the contracts (sellers) require you to pay a premium to buy them. Their bet is that the options contract will go unused and they will just “capture” or make money on the premium, which you have to pay when you purchase the contract. It is a fee of sorts, seen in both bitcoin call put options.
The value of the premium you have to pay to purchase a contract changes as the option gets closer to its expiration date, or in other words, as more information can be gathered about what the price will be as the option ends and the owner must decide whether or not to use it.
Bitcoin options – call, put, and earning $$
The options market allows us to also make certain predictions about the direction of a particular asset. The simplest way to understand this is by using the number of puts to call options or the “Put to Call Ratio” PCR. This is a simple calculation that expresses the confidence of sellers that the price of a stock (or crypto), in general, is headed in one direction or another.
Remember that sellers are betting against the buyers, and are trying to make sure their options go unused so that they can capture the premium at which they sold the contract.
PCR ratios can be used only when paired with “bands” or thresholds that are set to tell a trader that a movement is taking place. In other words, a PCR doesn’t mean anything unless you set up a framework to interpret it.
For example, Put options are used more frequently by institutional investors to hedge risks on long-term investments, so what would it mean if the PCR suddenly collapsed? Is a movement taking place? These are the things that a framework can help you decide.
Bitcoin options examples
Let’s say that 100 BTC on January 1st, is worth $7000 / BTC. You have a debt that can only be paid in 100 BTC on March 2nd, and you expect the price of BTC to go up, so you purchase a 3 month, American style options call contract, expiring on March 1st. The strike price for the contract is $8000 / BTC, and the premium is $50000. On March 1st, you look and see the price of BTC on some popular trading platforms is $10,000 / BTC and decide to exercise your option and pay your debt.
$800,000 + $50,000 premium = $850,000. BTC cost: $10,000 = you save $150,000 on the trade.
BTC put options example
In the same way, we can examine the cost of a call option. You buy 100 BTC on January first, for $7000/ BTC. You expect heavy volatility in the market and purchase a put option to sell your BTC for $10,000 / BTC with a $150,000 premium, expiring on March 1st. The price on March 1st is $8000 / BTC, so you exercise your option and sell the BTC for $1,000,000 to the contract writer on a regulated exchange.
$700,000 BTC cost +$150,000 premium = $850,000, sold for $1,000,000. You profit $150,000 on the trade.
Bitcoin options 2021
The options market is a way to limit risk for your investments and assets and to purchase or sell bitcoin options. When someone asks for more information simply explain to them what you learned in this article. Bitcoin options are relatively new but are rapidly expanding, as more and more investors are entering the speculative market.
Don’t worry if you feel like you’ve missed the boat! Gains can still be made if you’re smart about playing the options markets, especially if the price is volatile and unpredictable. Increased volatility doesn’t have to be a bad thing! Use bitcoin futures products, bitcoin futures contracts, or bitcoin options to increase your profitability.
By using our platform, you can use traditional options trading to maximize your returns and ride the trend lines.