Satoshi Heist Options Universitycurrently has a video collection I created with 3.5+ hours of guides and tutorials for Bitcoin options beginners. I showcase step by step this strategy which is great for beginners learning Bitcoin options. It includes: bitcoin 101, options 101, the statistics model I use to achieve 95% successful trades, a full Deribit platform overview, live trading examples, and risk management. If you are someone who learns better through videos and want to learn more about Bitcoin options trading then this may be what you are looking for.
Please comment any questions below so I can continue to enhance this guide, your comments will likely be the same questions other people ask as well so it will benefit the community. I get a flood of DMs and emails that I cannot always respond to so thank you in advance! Once you decide to trade on Deribit, sign up with my link to get a 10% discount on trading fees!
I did this exact strategy from the very day I started trading options and still do this strategy to generate more Bitcoin using my existing Bitcoin. Many of you have reported success as well – please let me know if you have questions, I’m pretty responsive since the community is still only about 980 people.
- The Basics of Options: Calls and Puts, Buying and Writing 🛠️
- The Long Call: Buying a Call Option 👍
- Are There Options on Bitcoin Futures? 📝
- How do Bitcoin options work and should you trade them?
- Should you trade them?
- 4. Wait until the contract expires worthless or buy to close to take profit
- ⚡ What are Crypto Trading Bots?
- 🏅 What should you look for before joining crypto derivatives exchanges?
- How Bitcoin Options Differ from Other Options? 🤔
- 2. Deposit Bitcoin
- The Growth of Crypto and The Importance of Options 💸
- The Rise of Crypto Derivatives 📈
- The Importance of Options Trading ✅
- What are options contracts used for?
The Basics of Options: Calls and Puts, Buying and Writing 🛠️
Let’s dive a bit deeper into calls, puts, writers and buyers. All of these are the key components of options trading.
There are two types of options contracts – puts and calls. Calls give the buyer the right to buy an asset at a certain price – called the strike price.
Puts and calls allow investors to speculate on price movements and hedge their portfolios. To put it in plain language, the buyer makes money when the underlying asset price is higher than the strike price.
Now that we’ve gone over that again, let’s take a closer dive into how the most popular options trading strategies work.
The Long Call: Buying a Call Option 👍
Buying a call option means a trader believes the price of the underlying asset will go up. Although one could buy the asset itself, this will also put them directly in the line of the asset’s risk; volatile assets make this an especially risky task.
However, a trader looking to buy a call has a capped risk of the premium price they pay to buy the option. With that, the profit potential is derived from how much the spot price goes over the strike price plus the premium. For example, let’s say the strike price is $1,000 and the premium is $100. Should the spot price reach 1,200, then the profit will be $100.
In addition to buying a call, traders also have the option to sell, or write, a put option. Selling a put option requires traders to agree on a strike price, should the buyer exercise their right to buy or sell. Should the spot price go higher than the strike price, buyers won’t sell, and the writer will make a profit.
If traders are less aggressive (or bearish) on the asset, they might buy a put option which gives them the option to sell at the strike price. This way they won’t need to short the stock. The long call works the same way, offering limited risk.
Another option, should you think the price of an asset will go down, is to sell/write a call option. When doing this, an agreement is made between traders to sell the asset at the strike price should the buyer exercise their right to buy.
This strategy is similar to the short put, its aim is to accumulate the premium along with the option, as buyers decide not to exercise the option. This usually happens when the spot price is below the strike price. When the spot price is above the strike price, the writer sells the asset at a cheaper rate. Traders typically use this strategy within a covered call strategy.
Are There Options on Bitcoin Futures? 📝
Yes. Options on Bitcoin futures finally launched in January 2020 on the Chicago Mercantile Exchange (CME). Traders have been pleading for exchange-traded options on Bitcoin, and in the first quarter of this year, they arrived!
Options and futures are slightly different in that the owner has the right at the expiry date of the option to go long in the Bitcoin futures contract. The owner of a put option has the right to go short on the Bitcoin futures.
Similarly to Bitcoin options, these come at a high price, and are seriously expensive. Options on Bitcoin futures imply a significant amount of volatility.
🏅 Ready to start trading? After learning about options, the next step is to start trading with one of the top options trading platforms. Many offer a free demo account, so you can start practicing without any risk.
How do Bitcoin options work and should you trade them?
In terms of core function, Bitcoin options on Binance work as described above, with a few key notes:
- Expiration date: The available expiration dates for trading Bitcoin options on Binance are: 5m, 10m, 30m, 1hr, 4hr, 8hr, 12hr, 1d.
- Underlying asset: Since the underlying asset is BTC, therefore the trading quantity is defined in BTC.
- Premium: The premium is paid in USDT, and is deducted from the Binance Futures wallet balance.
- Options: The options on Binance are American options.
In order to buy options on Binance, you will need a Binance Futures account, which can be easily activated. Once a Binance Futures account is created, you will need to transfer funds into your Futures Wallet from your Exchange Wallet, after which you can begin buying options.
Note: The Binance Options account is tied to the Binance Futures account, so it is important to exercise caution with options trading if you have open futures positions.
Visit Binance Now
Should you trade them?
It depends. Usually, options are used for risk management. So, in the world of cryptocurrency, in this case Bitcoin, options could benefit miners for example, since by buying puts they can cover their losses in case the price of Bitcoin goes down. If you have invested in Bitcoin in one way or another, you can find an options strategy that could help protect your investment.
Ohterwise, if you want to do speculative trading, then buying options is a safe way to start since you are not obligated to buy or sell, therefore, your losses are limited to the premiums you pay. In a way, the experience you gain is paid in premium fees.
4. Wait until the contract expires worthless or buy to close to take profit
Once your order has filled and you are in the trade you have 2 options: either wait until the expiration date so that the contract expires worthless (you collect 100% of the premium) OR you can buy the option to cover your position and take profits. I’ll show you an example of me doing both.
Option A: Wait until the expiration date to collect the full premium
In this example I waited for the expiration date to collect the full premium which was about $800 USD in one day! Remember, daily options expire every day at 08:00 UTC. In this scenario, no action is needed from you besides waiting until 08:00 UTC. The position will close and Bitcoin will automatically be added to your total equity in your portfolio. Your PnL is the amount of contracts you sold multiplied by the premium at which you sold your contracts for (less the fees of course).
Option B: Buy the option to cover your position and take profits.
There are instances when I don’t want to wait to collect the full premium. Usually this happens if I want to lock in profits quicker due to anticipating a price drop or if premiums are high on the next expirations and I want to free up my collateral from the existing positions to open another position.
Here’s an example of me closing a position: BTC 31 July 7500 P. I closed it because I was already at 100% ROI, and I wanted to open another position to take advantage of selling puts for the next expiration at a higher premium.
First click on the position you want to close.
When the order book pops up, select the quantity of contracts you want to buy to close your position.
1. I put 16.6 since that is my current position size and I want to completely exit this position to take profits.
2. Second, select the BTC value you would like to buy to cover your position, I put .0005 in this scenario as there are already sellers in the market for this price. .005 is also the lowest amount you can buy / sell contracts for on Deribit.
3. Click buy to execute your order. Remember, you are essentially buying back the put options you sold, so your position would be 0 (meaning you are out of the trade) after you click buy. To calculate your PnL (Profit n Loss) you take the amount at which you sold the put for and subtract what you bought the contract back for. For example I sold 1 put for .0025 BTC. Now I buy it back for .0005 BTC. PnL = .0025 BTC – .0005 BTC = .002 BTC. On July 31st 2020, the price of BTC was about $11,200 USD. So my USD PnL is $11,200 * .002 BTC = $22.40.
4. If the price at which you are buying the contract back for is a price that someone is already selling in the market for, your order will fill immediately (in this example at the top right askPrice you can see traders are buying for .0005 so I would be filled immediately). If the price at which you are buying the contract back for is lower than what someone is selling for, you will need to wait for your order to be filled.
⚡ What are Crypto Trading Bots?
Crypto trading bots are automated software that helps you to buy and sell cryptocurrencies at the correct time. The main goal of this software is to increase profits and reduce losses and risks. These applications enable you to manage all crypto exchange accounts in one place. Many such programs allow you to trade for Ethereum, Litecoin, Bitcoin (BTC), and more with ease.
🏅 What should you look for before joining crypto derivatives exchanges?
It is important to search for the best crypto derivative exchange before you start trading.
Here are some important steps you need to check before selecting a crypto derivate exchange.
- Reputation: The best way to find out about an exchange is to search using various reviews from individual users and with the help of well-known industry websites.
- Trading Fees: Many crypto derivate exchanges should have fee-related information on their websites. Therefore, before joining, you need to make sure you understand deposit, transaction, and withdrawal fees. Trading fees might differ upon the exchange you use.
- Payment Methods: You need to find out what payment methods are available on the exchange? Are they accepting Credit cards or Debit cards? Can you trade with USD, EUR, etc.
- All these details are important as if it has limited payment options, which may not be convenient for you to use them. You need to remember that buying cryptocurrencies with a credit card always demands identity verification. It also costs you a premium price.
- There is a bigger risk of fraud and higher transaction and processing fees. Buying cryptocurrency using wire transfer will take significantly longer as it takes time for banks to process.
- Verification Requirements: The majority of Bitcoin trading exchanges require ID verification to make deposits and withdrawals. However, some trading exchanges also allow you to remain anonymous.
- Most of them ask for verification, which may take some time. It helps you to protect the exchange against all kinds of scams and money laundering.
- Geographical Restrictions: Some functions offered by cryptocurrency exchanges are only accessible from specific countries. You should also make sure the crypto derivatives exchange you want to join provide full access to all platforms and functions in the country you are currently in.
- Exchange Rate: Various exchanges have different rates. So you need to search derivate exchange which provides an exchange. You will be surprised how much you can profit if you use the exchange. It is common for rates to fluctuate up to 10% and even higher in some instances.
- Support & Tutorials: Many crypto traders have developed training modules, videos, and blogs to educate their users. If you are new to trading, you can go through such a source to get a better idea of the tool. This will also help you to save valuable time while trading currency.
- Crypto Tax Software Integrations: It is easy to rack up your high number of trades when you trade with crypto bots. If you do not have the right software, reporting your crypto profit and loss on your taxes is challenging. It is crucial to look at the crypto tax software companies compatible with your desired Crypto trading bot platform. Having good crypto tax software that supports your crypto trading strategy can make your tax reporting easy.
How Bitcoin Options Differ from Other Options? 🤔
First and foremost, these options are what we would call European-style options. That means that you can’t exercise them before the expiry date. However, you can buy or sell the contract ahead of the expiry date.
Options contracts on stocks are based in the 100s, so you will have the right to buy or sell 100 shares of a stock – obviously, you can’t buy or sell 100 bitcoins. Options differ from stocks in many ways, especially since options contracts can reach tens of thousands of dollars. On top of that, Bitcoin’s high price means that these options contracts are even more expensive than the regular ones.
💡 Considering alternatives? If you’re looking for something a bit more cost efficient, stock trading might be the way to go. Take a look at our report on the leading online stock brokers to get started.
2. Deposit Bitcoin
Next you will need to deposit your Bitcoin into your Deribit account, if you don’t have any Bitcoin yet, read How to Buy Bitcoin with the LOWEST fees which is a post about where I personally like to buy Bitcoin at the best rates with the lowest fees.
Head over to your settings page by clicking your account name, and then click on deposit.
Your BTC deposit address will show up. Now copy your Bitcoin deposit address (I blacked mine out).
Head over to where you store your Bitcoin and click withdraw, then paste your Bitcoin address. Please double check the address to make sure you don’t deposit your funds into the wrong address.
Last, click the submit button and wait for your funds to arrive into your Deribit account. It can take between 10-30 minutes depending on the Bitcoin network traffic.
The Growth of Crypto and The Importance of Options 💸
After a rocky start, with a volatile, lawless and high rate of fraud, bitcoin has since attracted professional and institutional players around the globe.
Today, every bank wants to implement blockchain technology in an effort to reduce costs and improve efficiency. In the U.S, the biggest financial institutions have opened bank accounts for some U.S based cryptocurrency exchanges, while governments around the globe are in the process of trying to understand and/or implement their own cryptocurrency with a backing from the concerned banks.
The point here is that cryptocurrency is now breaking through all of its initial hardships in finding its way. Improved regulation has done and is playing its part in keeping out the bad apples and maintaining a fair and integral environment.
🏆 Looking for platforms that facilitate CFD trading? Contracts for difference are becoming favored by a growing number of investors. Take a look at our report on the top CFD trading platforms to learn more.
The Rise of Crypto Derivatives 📈
Only last year, the New York Stock Exchange-backed company performed a landmark move when it entered the market with Bitcoin futures contracts.
As a whole, crypto has grown exponentially, and is now leading change, though there is still a long way to go. Today, the cryptocurrency market cap is only just under $300 billion. The global stock market in comparison is worth almost $100 trillion. Thus, we can see that cryptocurrency is still only a baby in the financial field.
The Importance of Options Trading ✅
Options play an important role in all of this because they enable traders to be more versatile and hedge against risk. Similar to futures, options contracts allow traders to buy or sell a certain amount of an underlying asset on a pre-agreed date. Unlike futures, options give traders the right, but not the obligation, to buy or sell on the specified date.
This is dependent on whether we’re talking about a “call” option or a “put” option. We will go into more detail below but briefly, the difference between them is that a call option allows the trader the right to buy an underlying asset, and a put option allows the trader the right to sell.
Given that these are only rights, and not obligations, traders generally feel more content with the idea, especially in volatile markets, such as crypto.
What are options contracts used for?
The contracts are what give the buyer their right (to buy or sell) and the seller their obligation (to buy or sell), which is why buyers pay a premium to receive these contracts; they are paying for the option. Without these contracts, the trades themselves wouldn’t work as they wouldn’t make any financial sense to either party.
For example: In a call option, the buyer expects the price of the asset to increase, and suppose it does, they would exercise their option and buy the asset at the strike price from the seller, and then sell it on the market for a profit.
However, without any contracts, the seller would have no obligation or reason to sell their assets to the buyer for a lower price.