In the space of a few years, Bitcoin has gone from something couch potatoes trade for a slice of pizza via a Reddit thread, to one of the hottest commodities on the market.

In the last five years, total daily transactions in the Bitcoin market has risen 900% from 33800 to over 335,000 according to CoinDesk. As the cryptocurrency has become more popular, so have the instruments to trade it. More exchanges are opening up, and Bitcoin ETFs may be on their way. But one tool that is already up and running is Bitcoin options. While not regulated in the U.S. yet, there are various exchanges offshore that offer traders the opportunity to dip their toes into Bitcoin option trading. (See also: Bitcoin Pizza Day: Celebrating the $20 Million Pizza Order)

However, trading Bitcoin options is not for the faint-hearted. They are extremely volatile and very expensive. (See also: Why Aren't Hedge Funds Interested in Bitcoin?)

Bitcoin daily transactions

How bitcoin options trade

Bitcoin options trade the same as any other basic call or put option where an investor pays a premium for the right - but not obligation - to buy or sell an agreed amount of Bitcoins on an agreed date. Additionally, various offshore exchanges offer binary options, where traders bet on a yes/no scenario. For example, whether or not Bitcoin will rise or fall, or whether or not it will be above or below a specific price on a specific day.

Why are they so expensive?

One major difference in trading Bitcoin options at the moment is the price. Bitcoin is one of - if not the most - volatile asset trading at this time meaning to buy an option it is very expensive. Take a look at the below pricing screen for June 7, 2017.

An important tool in pricing an option is implied volatility. As IV rises, so does the price of an option. The above pricing screen for options with a 30 June (22-day) expiry show implied volatility ranging from 90% to above 200% for strike prices from 2000 to 3200. So how expensive is this? VERY!

As at June 7, the 30-day IV for the S&P 500 is nearing record lows at 7.27%, according to data from the Options Industry Council, and even in the height of the Great Recession it did not reach current levels in Bitcoin trading. On November 14, 2008, two months after the collapse of Lehman Brothers short-term IV reached record highs of 65%.

Additionally, the prices offered above have a significant bid offer spread, meaning you pay a big premium to deal. Some of the spreads are as high as 6%, compared to a generic U.S. Treasury option that would have a spread of under 0.1%. (See also: Why AMD Is Traders' New Bitcoin Play)

Bitcoin options trading in the U.S.

Currently, there is no local regulatory approved exchange for Bitcoin options. However, as interest grows, it seems only a matter of time. On May 22, Ledger Holdings, the parent company of bitcoin exchange LedgerX announced it had raised $11.4 million for its plan to launch a bitcoin option exchange. The New York-based company is awaiting approval from the Commodity Futures Trading Commission (CFTC) to operate a clearing house for Bitcoin options.

The Bottom Line

As popularity in the cryptocurrency grows the products to trade the underlying asset will widen. Despite being relatively new, Bitcoin option trading is available in a handful of countries. For those looking to dabble in options should be warned, they are expensive and volatile so buckle up!

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