Crypto options: As the cryptocurrency market matures, there are now many new financial toys available to play with.
Crypto trading has grown from strength to strength over the past few years. In 2020, the market size was valued at a respectable $1.49 billion. But, it is projected to scale up and reach a price point of $4.94 billion by 2030, growing at a compound annual growth rate (CAGR) of 12.8%.
As more investors have continued to make their way into this flourishing space, a number of crypto-centric trading tools have emerged and gained mainstream traction. These allow users – much like in the traditional finance sector – to indulge in various crypto-centric trading activities seamlessly.
Crypto options: What are ‘options contracts’?
A stock option can be described as a financial offering that provides an investor with the right to buy/sell a stock at a predetermined price and date. In terms of how these novel tools are traded traditionally, options are bought/sold as part of a time-bound setup that could be as short as a day or as long as a couple of years.
Quite like other derivatives-based tools (such as futures, credit default swaps, amongst others) stock options represent novel financial contracts. These allow traders to speculate on the price of an underlying asset, allowing for settlements to take place in the lieu of various fiat assets as well as cryptocurrencies.
Crypto options: What are they?
When an individual purchases an option, they have the right to trade its associated/underlying asset without being obligated in any way to do so.
In layman’s terms, crypto options trading works in much the same way, wherein an investor is required to pay a premium to acquire the “right” to buy/sell an agreed amount of crypto (eg: Bitcoin, Ethereum, etc) on an agreed-upon date. There, the cost of an option is usually referred to as a “premium.”
Types of Options
As the trading landscape has continued to evolve over the years, there have been two styles of options that have emerged and entered the consciousness of the mainstream masses.
American-style contracts: Investor has the right to exercise the option at any time, i.e. even before the expiry of the contract.
European-style contracts: The European contract allow their owners to exercise the contract only after their expiry. That said, even though European-style options are only executable upon their expiry, they can still be traded or closed out at an earlier time by their owner.
There are two different types of options contracts, call and put.
Call Option: Gives an investor the power to acquire the underlying asset at a predetermined price point (also referred to as ‘strike price’).
Put Option: Gives the buyer the ability to trade/sell off an asset at a fixed strike price.
An in-depth look at how crypto options work
Let’s assume that the value of a single bitcoin at the start of 2022 (e.g. Jan 1) stood at $24,000 but ‘Investor A’ is convinced that by the end of Feb. this number will be much higher. He therefore decides to acquire 10 European-style call options at a fixed rate of $26,000 for a 0.002 bitcoin premium per contract — scheduled to expire on, let’s say Mar. 1.
Mathematically speaking, 0.002 bitcoin at a sum of $24,000 per token works out to $48 at the time Investor A decided to purchase the above said call options (10 x 68 = $480).
Now each contract provides the investor with the ability to acquire 0.1 BTC at a fixed sum of $26K per token. Therefore, Investor 1 can potentially buy 1BTC for 26,000 when his contract expires.
That said, there are two possible scenarios that can potentially play out:
Case 1: If upon expiry, BTCs value stands at $30,000, Investor A can execute his contract and make a flat $4,000 profit ($30,000-$24,000 = $4,000) minus the associated premium of $480.
Case 2: If upon expiry, BTCs value is at $22,500 for example and Investor A forgoes his call option, he loses the premium ($480) he had to shell out.
Crypto options: Where can you trade them?
With the crypto market having matured drastically in recent years, a growing forum of investors have continued to seek out reputable exchanges in order to cure their options trading itch. Listed below are some platforms available in the market today.
Launched by Asian crypto giant Matrixport, a company that is headed by Chinese billionaire, cryptocurrency entrepreneur Jihan Wu. Bit.com is a high-performance derivative exchange offering its users a wide range of institutional and retail-friendly features. For example, the platform comes replete with a portfolio margin module that allows hedgers to accrue quality incentives all while minimizing their portfolio risks. Not only that, it also enables block trading on all products via the use of quality derivatives brokers such as Paradigm and ACCX.
When compared to other exchanges, bit.com offers users an advanced trading tool called ‘Unified Margin’, which in its most basic sense can be described as an upgraded trading and risk management system that adopts one single account solution to optimally trade options, spots, margin, perpetual and futures.
To elaborate on the setup, all collateral cryptocurrencies in the aforementioned unified account are shared as USDT denominated margin so as to not only enhance the system’s native capital utilization capabilities but also lower its overall liquidation related risks.
Another extremely popular cryptocurrency options trading platform, FTX is a platform that has at its helm Sam Bankman-Fried, an American entrepreneur who was recently hailed as the youngest billionaire in the world.
FTX specializes in the trade of many different derivatives and leveraged products including (but not limited to) options contracts, various volatility offerings, spot markets, etc. Also, every options call facilitated by the user on the platform is backed by many security guarantees. Furthermore, FTX’s user interface features a custom-built hot and cold wallet solution that requires the use of a two-factor authentication (2FA) approval each time a transaction is facilitated.
On a more technical note, when using the exchange, traders have the power to design/devise their very own options contracts and request a direct quote from the exchange. Once an offer is received by the investor, the individual can choose to either accept the deal, reject the request or propose a counteroffer.
Widely considered to be one of the most popular crypto derivatives platforms in the world, Deribit’s position as a market leader has only continued to grow in recent years as a result of the platform offering its clients a range of financial tools including futures, perpetual swaps, and options related to Bitcoin and Ethereum.
The exchange comes replete with an extremely professional dashboard that allows users with varying technical skills to seamlessly trade options, futures contracts. Furthermore, Deribit’s deep liquidity pool combined with its low latency rates (i.e. the time taken to complete a specified transaction) have helped spur its popularity amongst derivatives traders.
Lastly, it should be noted that all options on Deribit can only be exercised upon their expiry with all contracts being “cash settled”. Lastly, every option on the platform is automatically settled upon its expiry, i.e. any intrinsic value due is paid out to the owner as “profit”.
OKX, formerly known as OKEx, is a popular cryptocurrency exchange offering users with a range of features including options/spot/derivatives trading (amongst many others). The platform made its debut in 2017 and has since continued to accrue a growing amount of mainstream traction thanks to its industry-leading liquidity.
From a technical standpoint, OKX provides its clients with certain niche products designed to assist beginners in their journey towards trading options — all while providing them with various price discovery benefits (i.e. allowing investors to source the best deals for themselves).
Lastly, the platform also provides users with a host of technical data from global options markets, allowing them to identify and understand financial ongoing trends in order to maximize their profits.
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