Options appeared long before the creation of the first digital assets - they were used back in the 17th century during the 'Tulip Mania' in the Netherlands, and then in many other traditional markets. Today, this instrument is actively used in the crypto industry, helping traders to profit in a volatile market and effectively manage risks.
What are options and why are they needed in crypto trading
Options are derivative financial instruments that give the right (but not the obligation) to buy or sell a specific asset at a fixed price within a predetermined term. In the crypto market, options are most often used for highly capitalized assets like Bitcoin or Ethereum.
Unlike spot trading, where the trader buys the actual asset, or futures contracts, which require mandatory execution of the deal in the future, options provide greater flexibility, which is important in high volatility conditions.
Like other derivatives, options allow traders to profit from price movements without actually owning the cryptocurrency. For example, by purchasing an option to buy Bitcoin at $90,000, the trader can profit when the price rises to $100,000, even without owning the Bitcoin itself.
This instrument is also widely used for risk hedging - for example, a sale contract can be used to protect against a potential decline in the value of an asset in the future.
Some trading platforms offer second-order derivatives - options on futures, which combine the capabilities of both instruments and allow traders to apply more complex strategies.
How crypto options work: basic concepts
To trade cryptocurrency options effectively, it is important to understand the key terms used in these contracts. These include:
call option - gives the buyer the right to buy the asset at a fixed price in the future;
put option - gives the right to sell cryptocurrency at a set price on a specific date or before it;
strike price - the price at which the trader can buy or sell the asset according to the terms of the option contract;
expiration date - the last day when the option can be exercised;
premium - the amount that the trader pays for purchasing the option, regardless of whether it will be exercised.
Example: a trader purchases a call option on Ethereum with a one-month expiration, a strike price of $4,000, and an option cost of $200. This means that within the next month he can buy ETH for $4,000, regardless of the spot price.
If the price of $ETH rises to $4,500, he can exercise the option, acquire the asset for $4,000, and immediately sell it on the market for a profit of $500 minus the option premium. If the market price stays below $4,000, the option is not exercised, and the trader's loss is only $200.
This instrument is used in most other markets; for example, call options on bonds operate on the same logic. In the cryptocurrency industry, options on popular assets like Bitcoin, Ethereum, or Solana are in the highest demand.
Types of options in the cryptocurrency market
In the digital asset market, there are several types of options, each with its own features and usage scenarios. The choice depends on the trader's strategy, expectations regarding market dynamics, and risk tolerance.
European options
European options can only be exercised on the expiration date of the contract, regardless of how the asset price changes until that date. This approach provides greater predictability and clear control over execution timelines but limits flexibility in responding to market fluctuations.
European options are often used by traders who have a specific forecast for price dynamics on a certain date.
Example: a trader purchases a call option on Bitcoin with a strike price of $95,000 and an expiration date of December 31, 2025, being confident that on that day the market price will be higher than the contract.
American options
American options provide greater flexibility compared to European ones, as they can be exercised at any time before expiration. This allows traders to lock in profits upon reaching a price level without waiting for the option to expire, which is especially useful in high volatility conditions.
Example: a trader can purchase a put option on Ethereum with a strike price of $3,800. If the market value of the asset falls to $3,500, he exercises the option and sells at a better price without waiting for the expiration of the contract.
Binary options
Binary options operate on an 'all or nothing' principle. The trader bets on whether the asset price will be above or below a certain mark at the expiration of the contract. If the forecast is correct, the user receives a fixed profit (usually up to 90% of the bet); if incorrect, the trader loses the entire invested amount.
Example: the user bets $100 that Bitcoin will exceed $90,000 within the next hour. If the forecast is correct, he receives $190; otherwise, he loses the invested $100.
Binary options attract with their simplicity and potentially high returns, but this simplicity comes with high risks, causing beginners to often lose their deposits.
Advantages and risks of options trading
Due to their structure, options are suitable for both speculative trading and risk management. However, along with potential benefits, they also have drawbacks, especially relevant for beginners. Key advantages include:
limited risk for the buyer. In the case of an unsuccessful trade, the trader only loses the premium paid for the option;
potentially high returns. Successful forecasting can yield significant profits, especially when using leverage;
risk hedging opportunity. Options allow you to insure positions in the spot or futures market;
wide selection of strategies. You can combine multiple options to create a more complex strategy aimed at different market scenarios;
two-way trading. Traders can profit from both rising and falling markets through short positions;
low entry threshold compared to futures due to the absence of margin requirements.
However, along with the advantages, options are associated with certain risks and disadvantages that limit their application:
loss of premium. If the option does not generate profit before expiration, the trader loses the entire amount paid for it;
volatility of premiums. The price of an option can change sharply even without significant fluctuations in the underlying asset, depending on the demand for these contracts;
complexity of the instrument for beginners. Options require an understanding of how contracts work and strategies for managing positions;
low liquidity. Not all platforms offer a sufficient level of liquidity, making it difficult to open and close positions without slippage;
limited expiration time. If the trader misjudges the timing, even a correct market forecast will not yield profit.
Example: the user expects a decline in Bitcoin and purchases a put option at $90,000, paying a premium of $300. If at expiration the asset's value is, for example, $95,000, there is no point in exercising the option. As a result, the trader loses the $300 spent on the premium.
Considering these drawbacks, many beginners wonder: what is better - futures or options? However, it is difficult to give a definitive answer, as these are different tools that can be used for different purposes:
options are better suited for building complex strategies with a fixed level of risk;
futures are better suited for active short-term trading but can potentially lead to faster loss of deposit.
Therefore, before choosing a tool, traders should carefully assess their goals, strategy, and experience.
Cryptocurrency options trading strategies
Successful options trading requires an understanding of how they work, as well as choosing the right strategy based on the market situation. Different approaches allow traders to profit both from rises and falls in the asset.
Covered Call
The strategy applies when the trader already owns a certain amount of cryptocurrency and expects its price to remain stable or market volatility to be low. In this case, he can sell a call option on this asset, giving another market participant the right to buy cryptocurrency at a fixed price in the future.
The main goal is to generate additional income in the form of a premium for the contract. If the asset's value does not exceed the strike price, the trader retains both the asset and the premium. However, if it rises above, the trader is obliged to sell the asset at a lower price, but considering the premium, even in this case, the trade can be profitable.
Example: A user has 10 ETH purchased for $3,000. He sells a call option with a strike price of $3,200 and a premium of $100. If at expiration the value of Ethereum does not exceed $3,200, the trader keeps the ETH (the contract will simply not be executed) and receives a $100 premium. However, if the quotes rise, say, to $3,500, the owner sells the asset for $3,200, but also retains the premium, which reduces losses.
Protective Put
This strategy is used to reduce risks when the price of held cryptocurrency falls and involves purchasing a put option on this asset. This allows the trader to sell the asset at a predetermined price, regardless of how much the quotes decrease.
Essentially, this strategy is insurance: if the asset price falls below the strike, the trader can exercise the option and minimize losses. If the price rises, he only loses the premium cost while retaining the asset.
Example: A user has 1 $BTC , purchased for $90,000. To protect against a possible correction, he buys a put option with a strike price of $85,000 and a premium of $1,500. Then, if the price of Bitcoin falls to $80,000, the owner exercises the option and sells the asset for $85,000, limiting losses to $3,500 (taking into account the paid premium). In the case of a rise, the option simply is not exercised, and the premium costs can be offset by the increase in value.
Straddle
This strategy is used when a significant price fluctuation is expected, but the direction of the market movement is unknown. The trader simultaneously purchases a call option and a put option with the same strike price and expiration. This allows for profit from both rises and falls.
The goal of the strategy is to profit from volatility, regardless of the market direction. However, for this, the price must change significantly enough to cover the costs of purchasing both options. If the price remains within the strike price range, the trader will incur losses equal to the premium paid.
Example: The user expects high volatility in the asset before an important announcement. He simultaneously buys a call and put option on Ethereum with a strike price of $3,000 and a premium of $150 for each option. Next:
if the price of the cryptocurrency rises to $3,500, the call option yields a profit of $500 from which $300 for the premium must also be deducted;
if the price drops to $2,500, the put option yields a profit of $500 minus the same costs;
if the price of ETH remains at $3,000, both options lose value, and the loss amounts to $300.
Despite the flexibility and earning potential, each of the strategies discussed has its limitations and risks. Therefore, for using options, traders need to be able to analyze the market, consider all possible scenarios, and have a well-formed risk management strategy.
How to start trading options
1. Learn the basic concepts
2. Choose a trading platform (Select an exchange that supports options trading, such as Deribit, #Binance , Bybit, and others)
3. Start with demo mode
4. Follow risk management (Do not risk more than 1-2% of capital on a single trade. The high volatility of the cryptocurrency market requires special caution)
5. Analyze the market situation (Monitor market sentiment using indicators such as the Fear & Greed Index - an index that shows the predominance of fear or greed in the market based on data on volatility, trading volumes, social media activity, and other factors)
6. Gradually move to real trading (Start with basic trades: buying call or put options. Gradually transition to more complex strategies, such as straddles or protective puts. Always record results and analyze them for further improvement)
