Key Insights:
Option trading is a more complex but less risky way of trading crypto derivatives.
Selling Put Options and buying Call Options initiate a bullish trade.
Selling Call Options and Buying Put Options initiate a bearish trade.
Both Put and Call Options can be risky when traded single, therefore both are often paired to reduce the risk.
In cryptocurrencies, option trading is a way of hedging portfolios from volatility in the crypto markets but they are also used to make money without having a bulky portfolio.
In options, two parties having opposite market views bet against each other (via an exchange) and place certain amount of money upfront as collateral. Whichever, direction the market moves, one party wins everything and the other party loses it all.
However, modern platforms provide an option to exit before expiry helping you save capital.
This may sound similar to leveraged futures but are way less risky than them. In options, traders have the option to either trade with full risk or limit their risk as per their capacity. This is why options are generally more popular than futures in developed markets.
Option trading is not suitable for the novice trader because it is far more complex than futures markets and even more complex than spot markets.
Typically, a price range (say BTC from $100k to $150k) is divided into intervals (say of $10k) and each interval is assigned a price (strike price) as per the Black Scholes Model.
Bitcoin Options Chart
Delta Exchange
All option contracts eventually expire on a certain date and on the above chart, these dates are shown as 23 Mar, 24 Mar, 25 Mar, 28 Mar and so on. All option buyers and sellers trading under a certain expiry must liquidate their trades otherwise they risk incurring penalties by the exchange.
In The Money (ITM) means your option strike price is below the crypto's current price for Call Options and above the crypto's current price for Put Options(black cells in above chart).
Conversely, Out of The Money (OTM) means your strike price is above the current price for Call Options and below the crypto's current price in case of Put Options (gray cells in above chart).
At The Money (ATM) is where the orange line lies and is the closest strike to crypto's current price. The two strike prices below and above the line are called At The Money Call/Put Options.
Put and Call options behave differently. As the price rises, put options move out of the money and call options move in the money. Similarly, when prices fall, Call Options fall out of the money and Put Options fall in the money.
Typically, buyers of call options buy out of the money (above crypto's price) and hope to move in the money (price rises).
Similarly, buyers of put options buy strikes below the current price and hope that they move in the money (price falls down).
Sellers of call options buy in the money or close to the current price and hope that they move out of the money (price falls).
Sellers of put options buy in the money or close to current price and hope that they move out of the money (price rises here).
Selling a put option is a risky but highly rewarding way to go bullish on the markets. Usually, a trader sells OTM Put Option
Buying a Call Option is the least risky way of going bullish in cryto. Usually, ATM or OTM Call Options are bought but if the markets are highly bullish, traders also buy ITM Call Options.
Selling a Call Options is the easiest but a risky way of trading crypto derivatives. Usually, traders sell options which are OTM to remain safe, and hope that the price falls. However, if traders are convinced that the price has a higher chance of falling down, then they may sell ITM Call Options too.
Buying a Put Option is the least risky way of going bearish in cryto. Usually, ATM or OTM put options are bought but if the markets are highly bearish, then traders also buy ITM put options.
While the market are sideways, traders generally benefit from theta decay. Theta is the way of measuring how much value does a strike price have before expiry. If the option expirty date is 1 month ahead in a monthly expiry option, then at that time, the option strike price will have the highest value. Similarly, all strike price will have the lowest value near expiry (assuming no market movement).
To profit from theta decay, a strategy called "Strangle" is used, where the farthest non-zero Call Option and the farthest non-zero Put Option is sold. Non-zero here refers to strike price and not crypto price.
As time passes, the time value of the Call Option decays (theta decay) and the seller of these options profit from it.
Generally, an extremely OTM Put Option and an extremely out of the money Call Option is sold together. If the markets remain in between these strikes, then the entire option value goes to the trader.
Traders can also choose to sell only a Put or Call Option depending on their risk taking capacity. However, they need to know that in case the price moves rapidly in a single direction, their losses would surmount in the same pace.
A vanilla call option is an option without any cover. For all practical purposes it is as good as trading in leveraged futures. It is the highest kind of risk that you can take on a single trade in crypto options.
Selling a vanilla call opens high risk but if the market goes in your favour, you will have the highest rewards.
This call option is typically sold when the crypto markets are bearish and there is a good chance that markets may not recover from its recent lows.
To sell a vanilla call option, the user needs to choose a strike price above which the markets are unlikely to go in any situation.
For example, if Bitcoin has made a high of $100k at any point in time, and a bad news crushes its price down, then users might think of selling a vanilla call at $100k strike price.
This option trading strategy too has a high risk but also a high reward.
Selling a vanilla put is as good as going bullish with leveraged crypto futures and is done when there has been clear support in the markets at any point.
For example, assume that Bitcoin has made a bottom at $75k after falling from $100k and there has been a positive news in favor of Bitcoin that won't let it crash below $75k. Users may think to sell a put option at this $75k strike and when the market goes in their favor, they profit from it.
Disclaimer: Voice of Crypto aims to deliver accurate and up-to-date information, but it will not be responsible for any missing facts or inaccurate information. Cryptocurrencies are highly volatile financial assets, so research and make your own financial decisions.