The trade within the crypto market is not limited to spot trading but also embraces derivatives such as options, which provide traders a more varied approach than merely buying and selling digital assets. With crypto options, traders can speculate on price movements, hedge risks, and establish strategies without hold coin.

But how exactly do crypto options work? What else do traders need to consider before they just jump in? In this guide, Options Alerts will touch upon the fundamentals, detailing how crypto options are traded, their benefits, and the risks attached.

What are crypto options?

Crypto options are an option type that grants you the right but not obligation to buy or sell cryptocurrency for a particular price on a specified date. Call Options and Put Options are two of the usual option types.

Call Options: Call options give the holder the right to buy an asset at a specified price on a specific expiration date. For example, you purchase a BTC call option with a strike price of $50,000 USD. When the price of BTC is higher than $50,000 USD on the expiration date, you can choose to exercise this option and buy BTC for $50,000 USD, thus taking profit for the price difference.

Put Options: A put option gives its holder the right to sell an asset at a previously determined price on a particular expiration date. For example, you purchase a BTC put option with a strike price of $45,000 USD. If the price of BTC falls below $45,000 USD on the expiry date, you have an option to sell BTC at $45,000 USD, thereby protecting your investment.

Investors employ crypto options for different reasons but primarily for risk management and profitability in the highly volatile cryptocurrency market. Options are among the easiest hedging instruments. For instance, if you own BTC but are concerned about the decrease in its value, you can purchase a put option to protect in the money you invested.

Crypto options are also employed for profit maximization through advance trading strategies like straddles, strangles, or butterflies. These allow investors to profit from various market conditions, not just predicting whether the price will rise or fall.

Key terms for trading crypto options 

Strike Price: This is the price at which an options contract is exercised. For a call option, it’s the price you can purchase the underlying cryptocurrency. For a put option, it’s the price you can sell the underlying cryptocurrency.

Expiration Date: This is the date an options contract expires. After this date, the option no longer exists and cannot be exercised.

At The Money (ATM): An option is considered ATM when the strike price is nearly equivalent to the present market value of the underlying cryptocurrency. For example, if the current market value of Bitcoin is $30,000 and you have a Bitcoin call option with a $30,000 strike price, your option is ATM.

Out The Money (OTM):

+ OTM Call Option: The strike price is higher than the current market value.

+ OTM Put Option: The strike price is lower than the current market price.

In The Money (ITM):

+ ITM Call Option: The strike price is lower than the current market price. These options do contain intrinsic value as you could buy the cryptocurrency instantaneously for a price lower than the market price.

+ ITM Put Option: The strike price of the option is higher than the current market price. The options therefore have intrinsic values since you can exercise the cryptocurrency option and sell it immediately at a price higher than the market value.

Premium: The price through which you pay to buy an option contract. The premiums are based on a combination of two: intrinsic and extrinsic (or time values).

Intrinsic Value: This is the direct profit you would get if you exercised the option now.

+ For a Call option, intrinsic value occurs when the market price is greater than the strike price. (Intrinsic Value = Market Price – Strike Price, if negative, intrinsic value = 0).

+ For a Put, intrinsic value is always present when strike price is higher than market price. (Intrinsic Value = Strike Price – Market Price, if negative, intrinsic value = 0).

+ ATM and OTM options have zero intrinsic value.

Extrinsic Value: This is the part of the premium of the option that is not intrinsic value. It is a reflection of factors such as time to expiration, volatility of the market, and supply and demand dynamics. Extrinsic value decays over time and becomes zero at expiration.

How are Crypto Options Settled?

When a crypto options contract expires, it must be settled in one of two ways: physical settlement or cash settlement. Each method has its own implications for traders, affecting how they receive their payout and manage their positions.

+ Physical Settlement: With this method, the trader receives the actual cryptocurrency upon exercising the option. For example, if a Bitcoin call option expires in the money, the trader will get Bitcoin instead of a cash payout. 

+ Cash Settlement: In this case, the trader receives the price difference between the option’s strike price and the market price at expiration, typically in fiat currency or stablecoins like USDT.

How to trade crypto options: A basic beginning strategy 

Step 1: Choose a Trading Platform

Selecting a reliable trading platform is the first and most important step. Consider the following factors when choosing a platform:

+ Trading fees: Compare fees between platforms to find the best rates. Some charge a percentage of the trade value, while others have fixed fees.

+ Liquidity: Choose a platform with high liquidity to ensure easy buying and selling of options. High liquidity means more buyers and sellers, helping you get better prices.

+ Supported options: Make sure the platform supports the types of options you want to trade.

+ Security: Select a platform with strong security measures to protect your assets. Look for features like two-factor authentication (2FA), cold storage, and insurance.

+  Customer support: A platform with good customer service can help resolve issues quickly and efficiently.

Popular Crypto Options Trading Platforms

Step 2: Create an Account and Deposit Funds

Once you choose a platform, you need to create an account and deposit funds. This process is usually simple and similar to setting up an account on a regular crypto exchange.

+ Provide personal information

+ Complete identity verification

+ Link a bank account or e-wallet to deposit funds

Step 3: Learn Trading Strategies

Before trading, you should understand different crypto options strategies. Strategies range from basic to advanced and depend on experience and risk tolerance:

Covered Call: Ideal if you own crypto and want to earn income from premiums. If you own 1 Bitcoin and believe the price won’t rise much, you can sell a call option at a higher strike price. If the price stays below the strike, you keep the premium. If the price rises, you may have to sell at a lower price than the market.

Protective Put: Good for protecting assets from price drops. If you own Ethereum and fear a price drop, buying a put option lets you sell it at a set price, reducing potential losses.

Long Straddle: Buy both a call and a put option at the same strike price and expiry. Profits come from strong price movement in either direction.

Long Strangle: Similar to Long Straddle but with different strike prices. Cheaper but requires larger price movements for profit.

Step 4: Start Trading

Once you understand the basics and have a strategy, you can start trading crypto options. Managing risk is crucial. Before placing a trade, decide on: How much profit you aim to make, the maximum loss you’re willing to accept and your strategy for entering and exiting trades. To trade, you open a position by buying or selling an options contract. When you’re ready to exit, you close the position by selling or buying back the contract.

Step 5: Manage Your Positions

Once you enter a trade, monitor market movements and manage your position effectively.

+ Stop-loss order: Automatically exits a trade when the price reaches a set level to minimize losses.

+ Take-profit order: Automatically locks in profits when the price reaches a set level.

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