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Although most people may be inclined to believe that options are a relatively new concept, they couldn’t be more wrong. The practice of options for trading has been known to us for centuries, we have just modified them. Bitcoin options, however, are relatively new but function on the same principles. Let's look at these options in more detail and identify some of the best strategies further on.

 

Contents:

What Is an Option?

What Are the Different Types?

What determines the price of an option?

Most Common Strategies in 2021

Long Put

Long Call

Covered Put

Covered Call

Butterfly

Final Thoughts

 

What Is an Option?

In simple terms, an option is a contract that is drawn between a buyer and seller of a certain asset. It serves to provide the buyer the right to make a purchase of any asset under the agreement whenever they are ready to. That being said, the buyer is under no obligation to make this transaction if they are not willing to.

 

When this contract is drawn, the seller provides an expiration date of the option. This means the purchase is required to be bought within a specific time period before the contract can be annulled. Two models are encountered based on the expiration date. These are the American and European models.

 

The American model is finalized on the expiration date, whereas the transaction is completed prior to the expiration date in the European model.

 

What Are the Different Types?

Another grouping of options places them into two different classes; these are call option and put option. A call option is designed to provide all the purchasing rights of an asset to a potential buyer. On the other hand a put option does the opposite and offers the right to sell.

For us to understand how these work, let's look at a typical example. The Deribit exchange is currently the most popular scene for the trading of bitcoin options. Any user on this platform is entitled to buying and selling any type of option.

 

How do you know which options will be more profitable for your investment? Options work well because they involve the use of contracts. As such the general risk involved in trading them between parties is significantly reduced. Many experienced traders have been able to maximize their earnings by creating more sophisticated strategies by using several bitcoin options. As a rule; the best strategies are the ones that are made by integrating a variety of options.

 

What determines the price of an option?

Another classification of options is determined by the price. Under this category options can fall in either one of two classes, the first is in-the-money options (ITM) and the second are out-of-the-money options (OTM).

In-the-money options mean that the value of a particular asset has exceeded its strike price. As a result, it always has a value that is more than $0. This option is designed to always turn into a profit. On the other hand, OTM usually means there won't be any chance for profit.

To come up with the price of an option, the following parameters are taken into consideration:

  • The actual value of the asset in question
  • Calcification of the option 
  • The date the option expires
  • Strike price
  • The stability of the option on the market

 

The stability of the asset measures how volatile it is and the more unstable it is the higher its price.

 

Most Common Strategies in 2021

Want to learn more about common bitcoin strategies? Learn how to earn huge profits with the following strategies:

Long Put

Traders can buy a put option with a strike price usually valued at about $34000. With this strategy, you will be able to break even just below the strike value.

Long Call

In this strategy, the trader will be able to ascertain the value of bitcoin by evaluating its volatility in future markets. In this strategy, they will purchase a call option with a predetermined expiration date.

Covered Put

This is one of the best strategies to protect yourself from any losses that result from the volatility of the blockchain. Not only does the trader deal with options, but they also directly own cryptocurrency. By working with both, they have some kind of contingency in case they encounter any losses.

Covered Call

With this strategy,  you will be able to sell an option to other traders while simultaneously owning your assets. Most traders sell their options at a price that is equivalent to their total assets.

Butterfly

With this strategy, traders try to determine the price of bitcoin within a particular period set before the expiration date. To do this, they are required to buy and sell several call options which will help determine the direction of the value curve by comparing the current strike prices.

 

Final Thoughts

Having the right trading strategy will determine your rate of success. It takes some time for traders to find something that works perfectly well for them. That being said, it is advisable to take advantage of multiple strategies at the same time.

 

Doing so maximizes your chances of making more profit and ensures successful trading. We have looked at a few strategies that will make a difference when applied correctly. If you have any questions, get in touch with Finage, we can help you to get more Bitcoin data!

 


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