What options strategies are allowed on Bitcoin?
Daniel According to data from Blockchain, the daily volume of bitcoin (BTC) transactions has risen by more than 420% during the last five years – from 59,344 in January 2015 to 309,070 in January 2020. And as the demand for the cryptocurrency grows, so too does the number of ways to trade it. The latest addition for traders to sink their teeth into are bitcoin options.
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Bitcoin options strategies
There are different bitcoin options strategies that can be used depending on your motivation behind trading – whether it is to speculate on bitcoin’s price, or hedge against any risk to an existing BTC holding.
For speculative traders, there are a range of options strategies that can be used to take advantage of options volatility. For example, a straddle options strategy involves simultaneously buying and selling an equal number of bitcoin puts and calls with the same strike price and the same expiration date.
The idea is that the profit to one position would offset the loss to the other, ensuring you have a net profit – this means you could take advantage of bitcoin volatility, regardless of which way the market moves. However, if the loss from one bitcoin option is larger than the gains to the other, you’d have a net loss.
The most common options strategy for hedging an existing holding is a covered call – this involves writing a call option for the same number of BTC that you already own. If the market price declined, the short call option would offset some of the losses to your BTC holding. If the market price increased, then you would likely have to sell your holding, but you’d have earned the option premium.
What are bitcoin options?
Bitcoin options are a form of financial derivative that gives you the right, but not the obligation, to buy or sell bitcoin at a specific price – known as the strike price – at a certain date of expiry. You pay a premium – usually cheaper than buying cryptocurrency outright – in order to buy an option.
Unlike buying bitcoin via a cryptocurrency exchange, options enable you to take a speculative position on the future direction of a market price – whether this up or down.
Bitcoin options have been trading on cryptocurrency exchanges for a while, but were not regulated. Now, bitcoin options are being slowly introduced by some regulated institutions, although not every provider will have an offering, so it’s important to check where you can trade bitcoin options.