Crypto proponents have been excited by the launch of bitcoin futures and options, but many are unfamiliar with the fundamentals. Bitcoin options are a popular way to take advantage of a volatile market by strategically hedging some of the risk. To clear up the jargon associated with the most common form of derivatives trading, analysts here explain the role played by cryptocurrency options.
What Are Cryptocurrency Options?
In traditional finance there are two types of options that can be bought. These are known as a ‘call’ and a ‘put’ option. A call option will give the holder the right to buy an asset at the strike price. A put gives the holder the right to sell an asset at a predetermined price.
Alexey Markov, a trader at United Traders based in Moscow, Russia, told news.Bitcoin.com that options are one of the most important tools in traditional markets and widely used for speculation by traders on U.S. sites. “Trading volumes on an option contract often exceed the volumes on the underlying asset, such as stocks for example,” he explained. “Also various options are used to hedge risks for those participants who have large portfolios on their balances.”
Markov explained the crypto market has not escaped that phenomenon, but it is worth noting that at this current stage of the market the demand for options is not very high. Primarily, this is due to the rapid decline in BTC/USD trading volumes.
Aditya Das, an analyst at market data firm Brave New Coin, told news.Bitcoin.com that cryptocurrency options are financial instruments or contracts that give holders rights to purchase or sell a cryptocurrency for a predetermined price at a future date. “Often, cryptocurrency options can intimidate new participants because of the use of idiosyncratic terminology that differs from legacy options market jargon that is already complicated,” said Das.
He explained that an ‘upside profits’ contract is equivalent to a European-style call option, right to buy, whereas a ‘downside profits’ contract works like a European-style put option, right to sell.
According to Das, Bitmex is the most popular bitcoin-settled market currently, with Okex and Okcoin being popular alternatives.
He observed that the Chicago Mercantile Exchange (CME) is the most popular cash-settled cryptocurrency options platform, with the Chicago Board Options Exchange (CBOE) being a lover volume alternative. “The soon-to-be-launched Deribit ‘vanilla’ options platform has also been gaining attention because it advertises cheaper fees, and fewer maintenance shutdowns,” said Das.
Alexey Markov, meanwhile, highlighted Deribit and Ledgerx as other exchanges that give the opportunity to trade options. “Both offer ‘put and call options’ only for BTC. Currently, the earliest and latest expiration date available on these exchanges is 1 day and 238 days respectively, which is not bad, but at the same time the liquidity leaves much to be desired and the spreads are quite wide,” said Markov.
Looking ahead, traders are confident that with the growth of the overall capitalization of the cryptocurrency market, an increasing number of derivatives will also be developed, including options. These will give traders greater power than ever to buy and sell bitcoin where and how they want.
What are your thoughts on futures and options? Let us know in the comments section below.
Images courtesy of Shutterstock.
Need to calculate your bitcoin holdings? Check our tools section.