Crypto Options Trading: What You Need to Know

Crypto Options Trading: What You Need to Know

Many find options intriguing because they offer traders various ways to take advantage of a particular asset’s price. 

Options have been a part of the traditional financial marketplace for decades, but few know there are crypto options for those interested in capitalizing on digital currency market volatility. 

Understanding Options Trading 

In their most simple terms, traditional options come in two forms. A call option lets a holder have the right to buy an asset at the strike price. A put does the opposite, granting the right to sell an asset at a specific price. Those who purchase call options hope an asset will rise in price. People who purchase puts are banking the asset’s value will go down. 

The actual cost to buy an option depends on a few variables like the strike price, current asset price, volatility, and time before the option expires. The price of an option premium is also influenced by the ‘greeks’ (Theta, Delta, Gamma, Vega). 

Theta refers to the amount of time before an option expires. More time correlates with a higher option price. Delta essentially measures the chance an option will be ‘in the money’ once it expires. The change in delta is called gamma, as delta ebbs and flows depending on how in (or out) of the money an option gets. Finally, vega tracks forecasted volatility of an asset in the timeframe before it expires. 

All the above might seem confusing, but options only grow in popularity because they offer virtually unlimited financial upside. Investors can see immense returns with options they could not easily find with traditional stock investing. 

The Rise Of Crypto Options 

Crypto options keep gaining influence because they help traders hedge against risk and often allow settlement in either digital currency or fiat. Calls and puts are the two different types of crypto options, but there are also American and European styles of crypto options. 

The difference? A buyer can exercise the contract at any point before expiry with American-style crypto options. European-style options can only be exercised at the expiry moment. However, they can still be traded or closed out early. 

Many crypto options traders find markets are more volatile than ‘traditional’ options. These choppy conditions can benefit those who make the right calls and puts as they can make more money. The crypto options market (like the crypto world) is open 24/7 unlike the traditional financial market. 

While most of the current crypto options market is dominated by institutional traders, OKEx’s Lennix Lai projects retail options trading should rise across 2021 as more products emerge for investors to use. 

In the case of OKEX, Lai notes “Since launching Options trading back in January 2020, we have seen a 10x market growth in terms of volume and open interest.”

Those interested in crypto options trading do have a number of platforms to choose from. Just launched in 2020, Premia supports covered calls and put options for a variety of Ethereum and Binance Smart Chain (BSC) tokens. 

Premia utilizes ERC1155, allowing the platform to add support for any token through a single multisig transaction. In contrast, other options-supporting platforms have to deploy a new contract for each combination of token, strike price, and option expiration. This makes Premia’s model cost-effective in the long run. 

Premia users can harness the ‘Mint’ feature to create custom call and put options with a specific expiry, strike price, and quantity. Options are paid out based on an American-style model and users can buy and sell options to and from Premia’s secondary marketplace as long as there’s an existing offer. Premia users can also stake tokens to earn a share of platform fees.

Another DeFi platform, Deribit, offers European-style cash-settled options trading to crypto users. Prices are displayed in BTC or ETH but can also be seen in USD based on the latest futures prices. According to the project’s website, Deribit allows users to trade options with up to 10x leverage or BTC futures with up to 100x leverage. 

Shaun Fernando, head of risk at Deribit, notes the platform has become popular as retail traders turn towards crypto options. “Since inception in 2016, Deribit has seen well over a 1,000x growth in options,” he explains. 

A Strong Future For Crypto Options

The crypto options industry only looks to keep growing as retail traders enter the space and platforms continue to expand investing opportunities. 

editorial staff