Let’s talk about bitcoin options in 2020. The current crypto market sees the hype around technologies like blockchain increasing, while the traditional cryptocurrency or digital currency markets remain somewhat stagnant. While the price of BTC has nearly doubled for the year, losses for the last six months may keep investors and speculators away.
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!
Bitcoin options. What is a trading option?
Options trading is a type of trading that uses a contract to lock in a price for an asset like a stock share. 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.
Bitcoin put contracts
Let’s suppose for a second that you buy a volatile stock at $100 and it rises over a six month period to $150. You want to make sure that you keep these gains, or that your stock doesn’t lose value back below $100.
You might purchase an options contract to sell, or a “Put” contract, that gives you the right to sell over a certain period for $145. 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 $142 on the exchange, but you could sell at $145 using this contract.
You have successfully limited your risk or your loses using this type of contract. This is called the American options contract, and it gives you the option to sell over a certain period.
Bitcoin call contracts
Call contracts are essentially the opposite of a put contract. They give you the option to buy a stock or other asset at a price over a period of time. Using our example above, you could purchase a call contract to buy a stock at a price of $120 over a period of time. This $120 price is called the strike price.
Why would you want to do this?In order to limit your risk in a short sale, which bets that the value of the stock will go down. If you “short” or bet against a stock, and purchase 100 shares at $100, then your risk is theoretically unlimited, because the value of the stock has no limit.
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 their risk in the sale. You could also purchase a contract to buy the stock at $120 on only a certain day, this is called a European options contract.
Option contract premiums
Why wouldn’t you always pair an options contract with a trade? Simple, 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.
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.
Everyone sure Bitcoin will fall. How can they earn on it
The options market allows us to also make certain predictions about the market. The most simple calculation is 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 the market, 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 for 2020
The options market is a way to limit risk for your investments and assets and to purchase or sell bitcoin options. Bitcoin options are relatively new but are rapidly expanding, as more and more sellers and buyers are entering into the speculative market.
Don’t worry if you feel like you’ve missed the boat! Gains can still be realized 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.
Using Bitlevex, you can use traditional options trading to maximize your returns and ride the trend lines.
Sign up for your account today to get trading in crypto options!