Is It Possible To Trade Bitcoin Options?
Bitcoin has become an avenue for investments and trading. Investors and speculators alike have been flocking to get a piece of the pie, and a large number trading platforms and exchanges has made investing and trading in bitcoins easily accessible. Among the various possible financial instruments one can trade or invest in are options. One might ask if it is possible to trade options on bitcoins. Why wouldn’t it be? The first bitcoin call option was sold on December 9, 2009, and the first put option was sold on the April 12 the next year. Options on bitcoin are not only a great way to insure from the volatility if one is holding bitcoins but also a lucrative way to make money from the volatility in bitcoin’s value.
There are two options trading scenarios for bitcoins: vanilla options and binary options.
Vanilla Options
Vanilla options are simple call or put options. One can use these options to insure an investment in bitcoins, or to profit from volatility in the value of bitcoins by using certain strategies.
Because bitcoins are very volatile, it is prudent for someone holding bitcoins (denoted by BTC) to buy some put options to hedge/insure against a fall in the value of bitcoin. Suppose one is holding five bitcoins, he can buy 500 vanilla put option contracts (0.01 BTC per contract) to perfectly hedge his exposure. If the value of bitcoin falls, he can exercise the put options, which are cash-settled. Thus, the loss from the decline in bitcoin value will be compensated by the profits from exercising the put options.
Speculators interested in profiting from volatility can either opt for a long or short volatility trading strategy. Say the BTC/USD is currently trading at 250 and volatility is expected to be high, one can simultaneously buy call options at strike price of 260 and buy put options at strike price of 240. So if price goes below 240, the put option wins and if price goes above 260, the call option wins. This will ensure that no matter what the price of BTC/USD is at maturity, one will always be in profit. This is called a “long volatility strategy.” On the other hand, pursuing a short volatility strategy is required when low volatility is expected. In this case, one will have to simultaneously buy call options at a strike price of 240 and put options at a strike price of 260. Thus, one profits from both the call and put options provided the BTC/USD stays between 240 and 260.
Some people also do directional trading: if they predict that the price of BTC/USD is going to go up, they buy a call option or sell a put option or vice-versa for the downward trends.
Binary Options
Binary options are relatively new but have fast gained acceptance and popularity. They enable one to bet on just the direction of the price movement. Binary options come with expiry dates ranging from one minute to months. Consider this: if BTC/USD is currently trading at 250 and one predicts that it is going to go up and close higher at the end of the day, a trader buys a binary option expiring at the end of the day. At day’s end, if the price is higher than 250, he receives 0.01 BTC (it is usually the multiplier) per option contract. Similarly, if he predicts that BTC/USD is going to end the day lower than 250, he will sell the binary option and cash out if the prediction comes out right.
The Bottom Line
We can conclude that options trading in bitcoins is a good way to either insure or hedge one’s risks or earn profits from volatility and speculation. However, before jumping on the bandwagon, it is necessary to understand the risks in options trading and to not forget the risks associated with bitcoin as a currency, given that it isn’t backed by a government or central bank, and officials have yet to establish concrete tax and other regulatory policies on bitcoin.
Via: http://www.investopedia.com/articles/investing/033115/it-possible-trade-bitcoin-options.asp
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