At first, there were only crypto spot exchanges. Nowadays, all derivative instruments and trading techniques are available for crypto traders, including options trading. All major crypto exchanges offer bitcoin options trading on their platforms, but we have picked the best of the best in this article.
As the interest in cryptocurrencies grows, so does the number of ways to trade and utilise them. Cryptocurrencies can be sold and bought on centralised and decentralised exchanges; they can be staked, used for everyday purchases, farmed, mined, and even used in the gaming and entertainment industries.
They can also be traded in more ways than one. In this article, we will discuss one of such ways in which cryptocurrencies can be traded, i.e. options trading. We will also suggest the best platforms for you to trade crypto options.
First, though, let’s do a quick refresher on what are Bitcoin options and how they work.
WHAT ARE BITCOIN OPTIONS
Bitcoin options are financial tools that allow you to benefit from the volatility of Bitcoin without having to own the cryptocurrency for yourself. It essentially means trading Bitcoin on the speculation that it would either go up or down at a future time.
The speculated price is fixed and is known as the strike price. When the options contract expires, your profit or loss is based on whether or not Bitcoin gets to that strike price. Even though you can make losses in Bitcoin options trading, it is still low-risk compared to other forms of derivatives trading.
Bitcoin options are denominated in Bitcoin, but they are not the only types of crypto options. There are also contract options denominated in other cryptocurrencies as well as cash-denominated options.
BEST BITCOIN OPTIONS EXCHANGES COMPARED
Deribit was founded in 2016 in the Netherlands as a derivatives-only company majoring in Bitcoin and Ethereum options and futures trading. It offers up to 100x leverage for Bitcoin and 50x leverage for Ethereum for futures trading, and up to 10x leverage for Bitcoin options trading
Here are some facts about Deribit:
- It offers options contract denominated in Bitcoin
- It has a robust security system and also a comprehensive KYC regulation system.
- About 99% of the assets on Deribit are kept in hardware wallets
- It has a super-fast matching engine which eliminates the risk of slippage
- It offers its services in a mobile fashion on an app that runs on Android and iOS
- It strives to reduce the risk of bankruptcy for users by running an efficient margin maintenance system.
- It has competitive fees.
So how does one register on Deribit?
To register on the platform, enter the required information on the registration portal of the website. You will also need to verify your email and then your identity. Once that is done, a trading account is created for you, which you can utilise as soon as you make deposits. Deposits are only accepted in BTC and can be converted to ETH if the user desires.
There are four types of options contracts on Deribit, categorised by the time it takes to expire. They are the daily, weekly, monthly, and quarterly options contracts.
Being the sixth-largest cryptocurrency exchange in terms of derivatives volume, FTX deserves some attention. It was created as a Binance-backed venture by Alameda research in 2019 and has since grown to be a force to reckon with in the crypto derivative world.
FTX uses a ‘Request Quote’ system, a little different from conventional order systems. In the ‘Request Quote’ system, you design an options system, input the necessary parameters, click on ‘Request Quote’, and then wait for someone to bid on your quote. If there is no bid within five minutes, your quote will disappear. Quite interesting, isn’t it?!
The following features stand out about the options feature offered by FTX:
- The options contracts offered on FTX are European-style contracts. European-style contracts can not be exercised before the expiry date. They differ from American-style contracts, which can be exercised before the expiry date.
- Profit and loss are not settled in Bitcoin or other cryptocurrencies. Instead, they are settled in USD
- They expire automatically at 3:00 am UTC on their expiration date. You don’t need to close them manually.
- You can use their native token, FTT, to serve as collateral for the contracts.
- FTX centralises the liquidity risk such that no party is directly exposed to the counterparty risk profile. Therefore, it makes it easier to avoid the risk of liquidation.
Apart from traditional options contracts, FTX also has MOVE contracts, contracts that ride specifically on Bitcoin volatility. The MOVE contracts are usually much more volatile and should be contemplated well before you decide to try them out.
It is not surprising that Binance, the world’s largest crypto exchange, also offers options trading. Here are some things to note about the contract options on Binance:
- Binance offers American style options. This means that the buyer of the options contract can decide to close them anytime before the expiry date. This is not common in the crypto world.
- Binance only offers BTCUSD options.
- The contract is cash-settled, in USD
- Unlike FTX, Binance doesn’t act as the middleman between the buyer and the holder. Whoever buys Bitcoin options on Binance deals directly with Binance as the option holder.
- There is only one strike price on Binance options.
- The time frames on Binance options are much shorter, ranging from 10 minutes to 24 hours. This way, it’s easier for users to try out several trading strategies without having to wait long for the results.
- The profits from Binance options are unlimited.
- The only risk to trading Binance options is the risk that you’ll lose your option premium(we’ll explain what this means later in this article).
- It has deep liquidity and competitive pricing.
To trade Binance options, log into your account and activate your futures wallets(it’s not a big deal, you’ll just be given some reminders and told to watch a video). Then scroll to options and input the necessary parameters. Ensure you fund your futures wallet before starting a trade.
Delta exchange is a crypto derivatives company founded in 2018 and backed by a number of crypto giants. It is registered in Saint Vincent, Grenadines but not yet regulated under any financial authority.
One of the interesting features of this exchange is that it doesn’t require you to submit any document for KYC purposes. Therefore, you can transact on the platform as anonymously as you want. However, if you’re going to transact more than 2 BTC per day or hold more than 5 BTC in your account, you must submit some identification documents.
As a derivatives company, Delta exchange offers options contracts for eight different cryptocurrencies, namely BTC, ETH, LINK, MATIC, SOL, XRP, BNB, and AVAX.
Here are some facts about Delta exchange:
- It is based in Kingston.
- It has over 50 listed coins, including its native coin, DETO
- Holders of DETO enjoy free withdrawals, among other things
- It has a mobile application.
- It only processes withdrawals once a day after a manual review
- It uses multi-signature wallets as a security measure
- You can only deposit Bitcoin on the exchange
- It offers 50% cashback on options trading fees as well as referral bonuses
- There is no minimum deposit.
Signing up on the platform is easy and can be done within 30 seconds. It only requires that you put in your country, email address, and selected password. You then have to verify your email, and that’s all! No need to submit more information than that, except you want to transact a large amount of crypto.
IQ Option is a financial service provider that has endeared itself to the hearts of many traders. It was established in 2013 and registered under the Cyprus Security Exchange Commission (CySEC). It is also regulated by the Seychelles Financial Service Authority(FSA).
One of the things traders like about this exchange is that it allows deposits as low as $10 worth and offers a demo account for newer investors. Apart from the demo account, IQ Option also offers a standard account (minimum deposit of $10) and a VIP account(minimum deposit of $1900 and trading volume of $15,000)
It also offers 14 different cryptocurrencies, namely, Bitcoin, Ethereum, Ripple, Bitcoin Cash, Litecoin, Ethereum Classic, Dash, Zcash, EOS, OmiseGo, Qtum, and Tron. These coins can be traded on options using the financial tools provided by the broker.
To sign up on IQ option, you would submit your full name, your country of residence, email, and password. Then you would need to verify your email as well as your identity. IQ option is strict on verification procedures, so it’s vital that you provide accurate information to avoid being blocked out of your account.
Also, the platform presents you with a variety of deposit methods, including bank cards, bank transfer, Skrill, Perfect Money, AdvCash, Neteller, WebMoney, Linenaira, etc. They really make it easy for even newbies to understand trading mechanisms.
Quedex was founded in 2016 in Gilbrartral and is physically registered there. It is one of the first exchanges to offer Bitcoin-denominated derivatives with Bitcoin-centric instruments. This came to a head towards the end of 2021 when they were acquired by Bitso, a Latin-American crypto exchange.
Let’s consider some of the features that Quedex offers:
- It offers up to 10x leverage on BTC options
- It claims to store all of its assets offline in multi-signature cold wallets. Therefore, withdrawals are manual and are only processed once a day.
- It has an affiliate program where you can earn up to a 20% referral bonus
- There is a flat trading fee of 0.02% for makers and 0.03% for takers
- Deposits and withdrawals are free on the platform
- BTC is the only accepted coin
How do you register on Quedex? It is not the conventional method of providing email addresses and other necessary information; no, in order to create an account with Quedex, you have to first email the support team and then wait for further directions. This complex registration process, to me, is a minus on their part.
One last thing to note about Quedex is that their website is currently in the Beta stage, which means some features may not work as well as they should. Nevertheless, they do seem to be very efficient regarding security, so you can be assured your funds are safe with them.
HOW BITCOIN OPTIONS TRADE
When you buy a Bitcoin option contract, you are purchasing the right to buy Bitcoin at a fixed price within a specified period. You do not have to buy it when the contract expires, but you have the right to. Let me break it down further.
Let’s say Bitcoin is currently selling at $45,000, and you want to purchase a Bitcoin options contract at a strike price of $47,000 for a month. You decide to buy 10 options at a 0.002 premium per contract.
Your total premium will be 0.002 x 45000, which is $90 per contract. Since you’re buying 10 contracts, you will pay 900 dollars as a premium price. That premium paid gives you the right to buy Bitcoin at $47,000 anytime within the next month, no matter what price Bitcoin gets to.
Therefore, if, for example, Bitcoin gets to $55,000 at the end of the one month, you will still buy it at $47,000, making a gain of $6,000 along the way
On the other hand, if Bitcoin goes below your strike price, say $40,000, for example, you don’t have to buy it at that price. Your only loss would be the $900 paid as premium price, as it is non-refundable. However, it would have saved you a loss of $5,000, which you would have incurred if you bought Bitcoin at $45,000 and held it until it dipped to $40,000
Therefore, Bitcoin options provide a way to manage risk while benefiting from potential upsides.
WHY ARE THEY SO EXPENSIVE?
Let me try to explain this as simply as I can. In the world of options trading, there is something called implied volatility(IV). It’s an essential tool used in pricing an options contract. Put simply, the higher the implied volatility of an asset, the more expensive it is in an options market.
Now, come to think of it?! Which financial market is the most volatile? Definitely, cryptocurrencies will be at the top of the list. That is why crypto options are costly compared to options of other financial assets.
Therefore, these are all points to consider before going for a Bitcoin options contract. Considering all these, why do some still go for Bitcoin options?
Simple. It’s because of what they stand to gain.
We will now talk about the benefits of trading Bitcoin options.
BENEFITS OF BITCOIN AND CRYPTO OPTIONS
Enables you to speculate with more capital than you own
This is one of the major advantages that options trading has. Consider, for example, the scenario mentioned above. All you have to put down to speculate on the price of Bitcoin for a month is $900, and it gives you the opportunity to earn unlimited upside.
Your risk is limited to the capital used to buy the option
You won’t lose more than that. It is different from cross-margined futures trades, where you are at risk to lose your entire portfolio if the market so wishes. Therefore, you can consider the capital(or premium) as a non-refundable investment to lock in the prospect of buying your desired crypto at a lower price.
Enables you to speculate on price declines
That way, you can benefit from the arrangement, no matter the direction of the market. For example, let’s say Bitcoin is currently $45,000, and you expect the price to go down to 40,000(for example) in a week, you can buy a put options contract using a strike price of 43,000. That way, if Bitcoin really goes to 40,000, you sell it at 43,000 and gain 3,000 dollars.
Enables you to hedge your portfolio at low risk
Hedging involves opening two positions on one trade so that a loss in one direction is offset by a gain in the other direction. Bitcoin options allow you to hedge with low risk. Therefore, you can purchase an options contract in either direction and benefit from the one that rakes in profit.
COSTS AND RISKS OF BITCOIN OPTIONS
Risk of loss of entire capital
If the market goes against your prediction, your capital will not be recovered. So, this is a risk you have to bear in mind. Concerning that, you should only put in the capital that you are willing to lose.
Purchase fees need to be paid to the exchange
There are no two ways about it. You need to pay the premium, which is non-refundable, regardless of how the trade turns out for you.
It is generally advisable to trade Bitcoin options in deep liquidity exchanges for a perfect experience. Unfortunately, not all trading platforms have that much liquidity. Therefore, there is the risk of cascading liquidations if an exchange with low liquidity encounters high trade volume.
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CaptainAltcoin's writers and guest post authors may or may not have a vested interest in any of the mentioned projects and businesses. None of the content on CaptainAltcoin is investment advice nor is it a replacement for advice from a certified financial planner. The views expressed in this article are those of the author and do not necessarily reflect the official policy or position of CaptainAltcoin.com