As cryptocurrency goes mainstream, there has been an apparent increase in the number of market participants who come from a traditional finance background. This has seen growing demand for financial products which were not previously available to cryptocurrency traders, including Options trading. Earlier this year the Singapore-based derivatives exchange, Bit.com, went live with the industry’s first Bitcoin Cash Options trading. Since this is now available to us, I think it is wise to become educated on what Options are and how they could benefit you. This will decide whether it is something you can employ in your crypto investment strategy or avoid altogether.
This video is not financial advice and is purely for educational purposes.
So what are Options? The simple explanation is that Options are insurance for investors; they allow you to buy or sell an asset at a pre-determined price at a future date. This is done by entering a digital contract for either a Call Option or a Put Option, where each Option has an agreed upon price (known as the Strike Price) and an Expiration Date. The Call Option gives you the right to buy and the Put Option gives you the right to sell, any time until the expiry date. However, a holder of an Option contract has no obligation to actually buy or sell upon expiry. But how does that work? Well, when purchasing an Option contract you pay a fee which is given to another trader who has agreed to take up the risk of buying or selling your asset if and when you choose to do so. They get to keep this fee regardless of your decision.
This can be a lot of information to take in and process. So, lets take a look at what the Option trading interface actually looks like. Head over to Bit.com and create and account, the link is in the description. After that, you’ll want to head to the ‘Options’ section through the navigation bar. On the far left side of the page, you’ll want to start by selecting the asset you want to trade and an expiry date. In this example I’ll select Bitcoin Cash contracts expiring on the 17th of June. Looking to the main interface, you will now see that it has been populated with Call Options on the left side and Put Options on the right. Straight down the middle will be the Strike price, which is the price you want to buy or sell at on the expiry date. Call and Put contracts are bought or sold, similarly to how you would buy or sell the underlying asset in spot trading. This is illustrated by the Bids and Asks. What’s important to note is that if you want to own the Option, to hedge your risk, you must buy the contract and when doing so you pay a fee. Conversely if you want to take up another person’s risk and get paid for doing so, you must sell the Option. Buying & Selling can be done through either limit orders or market orders, just like normal spot trading.
With all that out of the way, you might want to know a bit about practical use cases for Options. The most obvious use is for speculative purposes; if you want to bet on the price of the asset going up or down you can do so by purchasing Options without even owning the underlying asset. A more sensible way to utilize Options is for crypto businesses who receive the underlying asset as income, particularly miners. Buying Options would allow you to hedge against volatility of the market, for a small fee, without disposing of the underlying asset. That way you can be sure your business has enough money to pay for future bills that you are expecting, for example wages or electricity costs. If you are a person that is more inclined to take on risk, you could be Selling options and collecting the fees from the person who bought the Option. In some cases, Options can be used to acquire an asset below the current market rate. This would be done by selling a Put Option at a strike price below the current market rate, if by the expiry the price of the asset has gone below the strike price then you get to buy those coins at the agreed price. If the price went up, you don’t get the coins but you still keep the fee. Some might consider that a win-win.
All-in-all this has been brief overview of Options Trading on Bit.com, which now supports Bitcoin Cash Options. If you want to take Options trading seriously, there is much more depth to it than what was covered in this video, so I would suggest you conduct more research before engaging in this type of activity. However, for those who knew nothing about Options previously, I hope I was able to provide you with some valuable knowledge. As always if you enjoyed this video, please like comment and subscribe. I’ll catch you next time.
