crypto options trading

Mastering Crypto Options Trading on Leading Exchanges

Tags: Bitcoin trading, Ultimate Guide

Crypto options are financial instruments that allow investors to bet on the value of the digital currency with leverage or to protect their digital asset holdings. Bitcoin options are accessible on both standard derivatives exchanges and cryptocurrency trading platforms, and they are becoming more popular among experienced cryptocurrency traders.

Individuals who trade Bitcoin options must carefully choose the correct trading platform. Factors like adequate liquidity and a strong security infrastructure should be carefully examined. This book has been created to give critical information for all option traders, including insights into typical questions that rookie option traders often experience when entering the Bitcoin options market.

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Exploring Crypto Options

Options are financial derivatives agreements that provide holders with the right, but not the responsibility, to purchase or sell a certain amount of an asset at a fixed price and on a particular date in the future.

In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin. While cryptocurrency options are a relatively new phenomenon, trading possibilities for Bitcoin and Ethereum options are currently accessible on a few conventional securities exchanges and cryptocurrency trading platforms.

From a technical standpoint, cryptocurrency options and options contracts related to assets such as stocks, indices, or commodities function in the same way. However, it is worth mentioning that crypto options have less liquidity than options tied to well-known stock indices or commodities such as gold. This disparity reflects the fact that crypto markets remain much smaller than their conventional investing equivalents.

European vs. American Options

Option contracts may be broken down into two primary categories: European and American agreements. The circumstances in which they exercise them are the primary distinction. Options that are structured in the European form can only be exercised on the day that they expire, while options that are structured in the American style may be executed at any time prior to the expiry date. Comparison of ITM, ATM, and OTM Options positions are classified as either in the money (ITM), at the money (ATM), or out of the money (OTM). An in-the-money option, also known as an ITM option, is one that has an inherent value and, when exercised, results in a profit. In the case of call options, this occurs when the current market price is higher than the designated strike price. When a put option is considered to be in the money, it means that the current market price is equal to or lower than the strike price. Because they do not have any intrinsic value at the moment, out-of-the-money (OTM) options would result in a loss if they were exercised or purchased. A situation like this arises in the case of call options when the current market price is lower than the strike price. When buying put options, on the other hand, this occurs when the current market price is higher than the strike price. An option is said to be at-the-money (ATM) when the current market price is equal to the strike price used to purchase the option.

Calls vs. Puts

When it comes to options trading, there are two main alternatives: purchase a call or buy a put. A call option gives the holder the right to buy the underlying asset, while a put option allows the holder to sell it.

The choice to purchase or sell Bitcoin put or call options is based on whether the goal is to speculate on an upward or downward price movement or to hedge exposure to cryptocurrency.

Physical vs. Cash Settlement

Options contracts may be settled in two ways: physically or in cash. In a physical settlement situation, such as with cocoa options, the parties may receive genuine cocoa shipments when the contract expires, according to the parameters provided in the options contract.

For physically settled Bitcoin options, bitcoins are transferred between the parties concerned. In contrast, cash settlement transactions include the exchange of dollars or another chosen currency.

Cautionary Points for Bitcoin Options Trading

Trading crypto options involves high risks. It is critical to note that bitcoin options trading has a higher degree of risk. For individuals new to derivatives trading, starting with a trial account is a good way to learn the subtleties of options trading before exposing investment funds to possible hazards.

Furthermore, it is vital to note that Bitcoin is not categorized as a regulated security; rather, it is recognized as a digital currency.

Investing in cryptocurrencies, decentralized finance (DeFi), and engaging in initial coin offers (ICOs) entails significant risk and speculation. The markets within these categories may be quite volatile. It is suggested that you seek the opinion of a trained expert before making any financial choices in these volatile and unpredictable markets.

Engaging in Cryptocurrency Exchange Trading

Cryptocurrency exchange trading has unique characteristics. Unlike traditional brokerage businesses, crypto exchanges are not regulated by the Securities Investor Protection Corporation (SIPC). As a result, unless specifically stated in user agreements, investors with bitcoin assets pooled on a custodial cryptocurrency exchange may face the risk of loss, similar to unsecured creditors.

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Key Considerations When Opening an Options Trading Account

When picking the platform for your options transactions, consider the following factors:

  1. Security: Choose a well-established cryptocurrency derivatives exchange with a strong security track record and no history of hacking.
  2. Costs: Trading costs may have a major influence on profitability, particularly among aggressive traders. Select a cryptocurrency derivatives trading platform that achieves a balance between affordable costs, platform dependability, powerful trading technology, and responsive customer care.
  3. Supported Cryptocurrencies: If you want to trade more than just Bitcoin, be sure the exchange you choose supports a wide selection of cryptocurrencies.
  4. Research Tools: When trading crypto options, use a platform that has a full suite of success tools. Look for features like charting tools, option calculators, and clear, easy-to-understand contract information.
  5. Storage and Custody: Choose a trading platform that primarily maintains client assets in cold storage, reducing the risk of fund loss due to exchange hacking. Additional security features, such as withdrawal address whitelisting, improve wallet security.
  6. Customer Service: Prioritize an exchange by providing prompt and high-quality customer service. Given the financial stakes involved, it is critical to resolve platform difficulties quickly with the aid of the exchange’s support staff.

Is There a Difference Between Bitcoin Options and Bitcoin Futures?

No, Bitcoin futures and Bitcoin options are separate financial products.

Bitcoin futures contracts require the buyer or seller to acquire or sell a fixed amount of Bitcoin at a future price and date. Crypto options, on the other hand, provide the holder with the right but not the responsibility to purchase or sell Bitcoin at a predetermined future price and date. This major distinction means that options provide more flexibility than futures.

What Are Some Ways to Protect Your Bitcoin Investment?

When it comes to mitigating the risk associated with digital assets, crypto options might prove to be an effective strategy.

This is an illustration of:

Consider the following: You have long positions in Bitcoin (BTC), Ethereum (ETH), Dogecoin (DOGE), and Solana. Your cryptocurrency portfolio is composed of these long-term holdings. You might purchase Bitcoin put options with a hedging ratio of one hundred percent in order to safeguard yourself against unanticipated market declines. In the event that the market had a severe decline, this indicates that the value of the put options would almost cover any losses that you would incur in your cryptocurrency holdings. The gains you get from the Bitcoin put options will help balance the losses you suffer throughout your whole portfolio in the event that the cryptocurrency market does, in fact, undergo a drop. If, on the other hand, the market continues to climb or remains unchanged, you will lose the initial investment that you made in purchasing the put options. When you use crypto options for hedging, you are able to protect your portfolio from adverse market movements. This provides you with some security against potential losses, and if the market performs well, you will only lose the amount that you paid for the options.

Do Crypto Exchanges Allow Option Trading?

Yes, you can trade options on certain bitcoin exchanges. Several digital asset exchanges provide crypto derivatives, including option contracts for cryptocurrencies such as Bitcoin. Plus500 is a well-known platform for cryptocurrency options trading. This exchange provides crypto options contracts with varying strike prices and expiry periods, enabling crypto traders to use a variety of options trading tactics. It’s crucial to remember that not all cryptocurrency exchanges allow options trading, so it’s best to look into the unique features given by each exchange.

Our recommendation:
Invest with Plus500

Broad asset selection in equities and options
Free and unlimited demo account
Advanced free-of-charge analytical trading tools
Global and regulated fintech platform