In our latest post, we mentioned howĀ BinanceĀ facilitates you to trade Options and how it is one of the most profitable trading strategies that you could incorporate in your investment or active trading style.
What is an Option?
I don't know if you knew but Options are an amazing asset class.
An options contract is a derivative investment that gives the owner of the contract the right to buy or sell a specified amount of shares, crypto, or another underlying asset at a certain price before a certain date.Ā
Options can be used to achieve different goals. Investors may trade Options to generate additional income or hedge a position.Ā
Options areĀ derivativesĀ contracts, which means their value is "derived" from the value of something else, in this particular case, the price is derived from the underlying crypto.
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There are two basic types of options:Ā CallĀ andĀ Put.
Call options allow contract traders the right to buy the underlying asset while put options allow the contract owner the obligation to sell the underlying asset.
A trader buys a Call option with the expectation that it will rise in value in the future.
Conversely, a trader buys a Put option with the expectation that the price of the underlying asset will decline in the future.
Traders usually focus on trading bitcoin pairs on the Spot and more advanced traders use the Futures market. Trading crypto Options is not as popular as other marketsĀ
Options are divided into American-style and European-style options based on the dates on which they may be exercised.Ā
American options allow traders to exercise the rights at any time before and including on the expiry date of the options whereas European options can only be exercised on the expiry date of the options. Binance offers American-style options as you can exercise the right before expiration.
Options are composed of several elements; as shown in the image below:
Image courtesy of Binance Academy
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Learning about and trading options has its hurdles. Options trading involves significant risks and is not suitable for everyone.
Some of the more complex strategies can carry substantial risk. In addition, options are a decaying asset that will lose value over time and ultimately expire.
And since options are derivative securities, the trading and pricing of options are inherently more complicated than crypto and stocks.
This combination of complexity and risk can leave many investors confused or unprepared for the realities of options trading. However, this course is different from other Options education.
Options are used to placeĀ bullish,Ā bearish, or evenĀ neutralĀ trades. Therefore, options can be traded in all kinds of market conditions.
There are other elements related to Options that will determine the premium (the price you pay for each contract). These elements are called "The Greeks".
Options Greeks are a whole subject that we won't abord here because it would mean another full article!
For more information about the Greeks,Ā check the Investopedia websiteĀ which has a very comprehensive guide to understanding the Greeks.
Trading Options is more complicated than trading on Spot or Futures markets because all the thing that influences the price but they benefits equals the risks.
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Trading Options on Binance
We mentioned in our previous article that you can trade Options from theĀ Binance Mobile App.
This is actually weird because you can only place an Options trade thru the mobile app, not on the desktop or website.
To place an Options trade in the Binance Mobile App, tap on "Futures" in the below part of the screen.Ā Ā
After selecting "Futures",Ā you need to select Options from the menu in the first line (checkĀ how to trade USDT-Futures in this article)
In the Options screen, the first thing you'll probably notice is how you can change theĀ Expiration date.Ā
If you click on BTCUSDT you'll be able to select and place Options on BTC, ETH, XRP, LTC, LINK, and BNB.
As you noticed, these Options have a very short expiration date, ranging from 5m to 24h. We don't recommend using a short timeframe because the price needs to "time to develop".Ā
BinanceĀ also offers another type of Option not mentioned before called "Vol".
When you place a Vol Option, you're basically buying both Call and Put Option in the same contract.
It's a good way to hedge against price going in either direction but benefits are diminished considerably; we recommend taking a one-way decision: Call or Put.
Notice how in the image above, the Premium increases depending on the order type (Call, Put, or Vol) even though the amount would be the same (0.05 BTC):Ā
0.05 BTC Call Exp. 1h = $35.34 USDTĀ
0.05 BTC Put Exp. 1h = $74.21 USDT
0.05 BTC Vol Exp. 1h = $98.59 USDT
You have to consider price movements when you placing an Options since very low timeframes usually don't allow the price to move considerably.
We don't recommend timeframes lower than 30m (unless you're in from of the PC when BTC crashes and are able to "catch" that fall). Otherwise, stick to larger timeframes.
Also, we just noticed thatĀ Binance launched a giveawayĀ to promote Options trading on their platform (We promise this is a coincidence! We've been preparing this article for a while.)Ā
Trading Options on Deribit
For thoseĀ Advanced Traders, tradingĀ Options on DeribitĀ is what you'll expect if you're used to trading Stock Options.Ā
InĀ Deribit, users can expect every element of traditional options trading, including weekly, monthly, and yearly expiration date. Also, when you're trading on this platform, you'll need to consider the greeks (as mentioned above).
For Novice Traders, we recommend you start trading options onĀ BinanceĀ because of its simplicity. Once you manage every single aspect of Options trading, you can useĀ DeribitĀ to increase your profits!
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