Many times rejected by small investors in favor of other more conventional instruments, often associated with the 2008 financial crisis with the expression “financial derivatives” that over time has acquired an increasingly negative connotation, finally explained in such a way Intricate that even the most willing student without a math degree can escape.
Both abused by retail investors and so used by large investors in traditional markets. We are talking about famous (or infamous) options. In this article we will try to clarify what they are and try to show that the bad reputation that they enjoy in the eyes of the general public is really unfounded and that, on the contrary, if they are used correctly and consciously, they have characteristics that make them very useful tools. Useful to enrich your investment arsenal and trading strategies. To do this, we begin by clarifying the basic concept, which, however, many people manage to complicate already in the game.
What is an option?
The option can actually be considered as insurance on the asset we have, Bitcoin in our case , in a particular scenario that we believe or fear may occur. To have this possibility, this “option”, in fact, you pay an initial amount (just like one that pays the insurance premium at the time of contracting), high or low, depending on the probability of the scenario occurring. And as in the case of insurance, the option has an expiration date, at the choice of those who buy it, beyond which it is no longer valid and cannot be exercised by the owner.
If our vision is an increase in the price of bitcoin, we will buy an upside option that “protects” us from a price increase beyond a certain value and will allow us to buy BTC in the future at a lower price, decided by the buyer in the purchase. This type of option is called CALL option.
If, on the contrary, our opinion is bearish, we will buy a drop option that protects us from a decrease in the value of bitcoin below a value of our choice (always called a strike). This option is called PUT.
And now the question arises: “But if my vision is optimistic, why not buy Bitcoin now before the price rises? And if it is bearish, why not sell now? Well, the advantage of the option is precisely this: it gives us an opportunity to delay the decision at a later date. If we have been right, the insurance / option will charge us the price difference between the value decided at the time of conclusion and the actual value on the day of sale (or expiration of the option). Otherwise, the option expires and we will have lost the premium paid initially. It should be noted that, as in the case of an insurance policy, the maximum loss is the amount paid at the time of conclusion. There is no settlement risk. ”
Where to buy options in bitcoin and how: the differences between providers
Surely the first market mentioned in this regard is the CME, Chicago Mercantile Exchange, where futures and options are traded on traditional financial markets. Since 2020, options in Bitcoin have also been added. The same goes for the platform BAKKT which is part of the ICE group. However, trading in these markets is only open to institutional and professional investors. A common investor who wants to buy options in Bitcoin must trust other types of platforms. Almost all exchanges offer the possibility to buy futures, but not options in Bitcoin, which today is the prerogative of only Binance, FTX, Deribit, Okex and LedgerX. Are they all equivalent? What are the differences?
While for futures, all exchanges provide similar, if not identical, services for options, the situation is different: Binance and FTX provide a service only on demand, i.e. there is no market with a book of offers and deals as we are used to seeing, but you must request a particular option with the desired characteristics and wait for a quote from the exchange itself or another user of the platform with the intention of selling it. This type of transaction can be defined as OTC, that is, each option is tailored to the applicant and is only recommended to experienced users who know what they are doing, since this type of market is less liquid and less transparent.
Deribit, Okex and LedgerX, on the other hand, offer a type of trading similar to that of any cryptocurrency or futures on cryptocurrencies, and in the mold of the options listed, then standardized, with a buy and sell book, and the same characteristics for each participant From the market. This feature makes it easy to buy and sell and understand what you are doing.
LedgerX, however, is currently only open to US citizens.