Trading with options on bitcoin has some advantages over futures contracts, such as those offered by BitMEX, OKEx, Binance and others. While the latter are characterized by the risk of early settlement of the leveraged position due to the volatility of cryptocurrencies, the options allow the investor to hold back maximum gains and losses, even with volatile assets such as the bitcoin (BTC).
Institutional traders have been operating for a long time in the options market. Investors now have contracts for options for buying and selling cryptoassets similar to those of the stock markets. Thus, the buyer of a call can acquire the bitcoin for a fixed price on a predetermined date. For this privilege, the buyer pays an initial premium to the seller of the purchase option. Contracts have a set expiration date and a strike price so that everyone knows potential gains and losses beforehand.
Although they are much more complex, these instruments allow traders to win both in bull or bear market. That way, if the bitcoin is valued, the price paid for a purchase option of a value above the market is expected to increase. The buyer can sell this option contract and close his position at a profit or wait until the expiration of the contract and exercise the option by buying the asset at the predetermined price.
The main benefit for the buyer of an option is that he knows the maximum loss in advance and also does not have to worry about closing his position if the market is too volatile. In futures contracts with BitMex, investors generally leverage their position to extend earnings. But if the market has a very strong variation, its position is automatically settled by the system.
How bitcoin options work
For example, the investor can buy a call option by paying a US$ 450 premium for the right to buy bitcoin at US$ 7,500 at a future date. In this way, the buyer has an initial investment limited to US$ 450, while he can get returns proportional to the price variation of the underlying asset.
The premium paid in advance for a call will depend on the current price of the bitcoin, the amount of days until expiration date, and recent volatility. The farther the strike price is from the current quote, the cheaper the option to purchase. And the further away from the expiration, the higher the price of the premium paid for the option. Finally, the more volatile, the higher the price paid.
Another alternative is for the investor to sell a buy option, to generate an additional remuneration on top of the bitcoins that are already on hold. If the buyer exercises the option, whoever sold the option is required to transfer the bitcoins to the option buyer. But if the option is not exercised, the value of the prize stays with the seller of the call. The investor can also buy a sell option to protect himself from future bitcoin falls.