Bitcoin options are financial derivatives that enable investors to speculate on the price of the digital currency with leverage or hedge their digital asset portfolios. Available on both traditional derivatives exchanges and on crypto trading platforms, Bitcoin options have emerged as a popular investment product among advanced crypto traders.
For individuals looking to trade Bitcoin options, finding the right trading venue that offers ample liquidity and a high level of security is essential. We’ve compiled the basics every option trader should know, and have structured this guide for trading Bitcoin options so that it should answer the questions most novice option traders have.
How to Buy and Sell Bitcoin Options
Understand the Basics
Options are financial derivatives contracts that give holders the right but not the obligation to buy or sell a predetermined amount of an asset and a specific date in the future. In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin (BTC). While the cryptocurrency options market is still fairly new, you can already trade Bitcoin and Ethereum options on a handful of traditional securities exchanges and crypto trading platforms.
From a technical point of view, cryptocurrency options and options contracts on assets like stocks, indexes, or commodities function in essentially the same way. However, crypto options are generally less liquid than options on leading stock indexes or commodities like gold. That’s a result of the crypto markets still being a lot smaller than traditional investment markets.
European vs. American
There two main types of options contracts: European and American. The key difference between the two is that European-style options can only be exercised at expiration, while American-style options can be exercised at any time up until the expiry date.
ITM vs. ATM vs. OTM
An options position can either be in the money, at the money, or out of the money.
- An in-the-money (ITM) option means that the price of the underlying asset is trading above (or below) the strike price (depending on whether it is a call or a put option). In this scenario, your position could be operating with a profit.
- An out-of-the-money (OTM) option means that the price of the underlying asset has not surpassed the strike price, meaning your position could be operating with a loss.
- An at-the-money (ATM) option is currently trading at or close to the strike price.
Calls vs. Puts
You can either buy a call or a put option. A call gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset.
Whether you buy or sell a Bitcoin put option or call option depends on whether you want to speculate on a rising or falling price or whether you are looking to hedge crypto exposure.
Physical vs. Cash Settle
Options can either be cash settled or physically settled. For example, if you trade cocoa options, you could—if the options contract determines it—receive cocoa shipments once the options contract expires.
Since bitcoin does not come in physical form, you can only settle in cash (i.e., in bitcoin) or if the options contract is based on Bitcoin futures, you could receive Bitcoin futures when the contract settles.
Best Options Trading Platforms
|tastytrade||$0||$0 stock trades, $1 to open options trades (capped at $10 per leg), $0 to close|
|Interactive Brokers||$0||$0 commissions for equities/ETFs available on IBKR’s TWS Light, or low costs scaled by volume for active traders that want access to advanced functionality such as order routing. $0.65 per contract for options on TWS Light; that is also the base rate for TWS Pro users, with scaled rates based on volume. $0.85 per contract for futures.|
|Webull||$0||$0 commissions for stock, ETF, options, and cryptocurrency trading (small markup is priced in)|
Know the Risks
Trading cryptocurrency options involves a high level of risk. If you are new to derivatives trading, you should probably start off with a demo account to learn the ins and outs of options trading before putting investment capital at risk.
Options Are Riskier Than Spot Trading
Trading Bitcoin options is generally riskier than buying and selling Bitcoin in the spot market. For example, if you buy a call option on Bitcoin with a strike price of $35,000 with an expiry date that is three months away, and the price of Bitcoin doesn’t surpass $35,000 by the expiration date, you will lose the options premium (the price you paid for the option) in full.
Options Are More Complex Than Spot Trading
When trading Bitcoin options, the price of Bitcoin is not the only factor affecting the value of options contracts. There are several key factors that affect the value of the options you buy or sell, but time decay is by far the most critical. That’s because as the time moves closer to the expiry date, the value of an options contract decreases because the time remaining to trade or exercise the options diminishes.
The Bitcoin Options Market Is Less Established
While Bitcoin options can be found on traditional securities exchanges, like the Chicago Mercantile Exchange (CME), and on dedicated crypto trading platforms, the BTC options market is still quite young and doesn’t have the deep liquidity found in mature options markets. This can affect price slippage, especially in options with longer maturities.
Steps Required to Open a Bitcoin Options Trading Account
Trading Bitcoin options is different from trading spot Bitcoin. Not only is the risk profile of your trade completely different, but there is a range of different aspects to consider when looking at which Bitcoin options contracts to buy or sell. But before you can start trading Bitcoin options, you need to sign up to an exchange that supports crypto derivatives.
If your online brokerage account provides you with access to the CME, you could trade Bitcoin options on the leading securities exchange. For most private investors, however, the more likely choice will be to sign up to a digital asset exchange that offers Bitcoin options trading.
Examples of crypto trading platforms that provide Bitcoin options include Bit.com, ByBit, Deribit, and OKX,
Here’s how it works.
Step 1: Sign up for a crypto exchange
Find a digital asset exchange that offers Bitcoin options trading. Ensure you only sign up to a reputable exchange.
Step 2: Complete KYC and deposit funds in your trading account
Complete the onboarding process, which typically involves a Know-Your-Customer (KYC) verification process. Next, deposit U.S. dollars (using one of the exchange’s available fiat funding options) or cryptocurrency in your exchange account.
Depending on your verification level, you may require additional approval from your online broker or crypto trading platform before you can trade options. This typically involves filling out a questionnaire in which you demonstrate that you understand how options work and are comfortable with the risks involved in trading derivatives.
Step 3: Practice trading options using a demo account
Ideally, the exchange you have signed up for offers a demo trading account where you can start trading Bitcoin options without putting real capital at risk. That way, you can become comfortable with how the options Greeks affect Bitcoin options.
Step 4: Research the Bitcoin market
Learn what drives the price of Bitcoin to get an idea of what type of options trading strategy is best suited for the cryptocurrency and for your risk/return profile. The more you learn about the Bitcoin market and Bitcoin options, the more likely you are going to trade options profitably.
Step 5: Place your first Bitcoin options trade
Once you feel comfortable with Bitcoin options and how they work, you can place your first trade.
What You Need to Open an Options Trading Account
To open an options trading account, you need the same documents as for a standard spot trading account.
Crypto options trading platforms generally require the following information from you:
- Full name
- Email address
- Phone number
- Home address
Additionally, to pass a trading platform’s KYC process, you will also need to provide a scanned copy of your government-issued ID (such as a passport or a driver’s license) and proof of address (such as a utility bill or a bank statement). You may also be asked questions about your level of expertise as a trader to enable access to derivatives trading products on the platform.
Crypto exchanges generally have very low minimum deposits; $10 to $20 is the industry standard, although there are also trading apps that allow you to start buying crypto with as little as $1.
To trade Bitcoin options, however, you will definitely need more than $1 to get started. Even the cheapest BTC options contracts have premiums worth over $10.
Best Cryptocurrency Exchanges
|Company||Transaction Fees||Currencies||Minimum Deposit or Purchase||Trade Limits|
|Kraken||0.00% to 0.26%||185+||$1||No|
|Coinbase||0.00% to 0.60%||200+||$2||Yes|
|Crypto.com||0.00% to 0.075%||250+||$1||Yes|
Types of Cryptocurrency Exchanges
Centralized crypto exchanges are online trading platforms that look and feel like traditional online brokerages, such as Merrill Edge or E*TRADE. You can use them to trade a range of cryptocurrencies in the same way you would buy stocks, bonds, or ETFs using an online broker account after you have registered and completed KYC.
Decentralized crypto exchanges are Internet-native online trading venues powered by smart contracts that allow traders to buy and sell cryptocurrencies on a peer-to-peer basis. Crypto assets are traded directly from wallet to wallet. There is no need to create an account or complete a KYC onboarding process, making DEXs accessible to anyone in the world.
Hybrid crypto exchanges merge a centralized order book for matching trades with decentralized crypto asset custody, allowing crypto traders and investors to benefit from the best features of both types of crypto exchanges.
Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the Securities Investor Protection Corp. (SIPC). Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as unsecured creditors.
Factors to Consider When Opening an Options Trading Account
Security: Choose a reputable crypto derivatives exchange that has a high level of security, highlighted by a track record of no hacks.
Fees: Trading fees can affect your trading profitability, especially when you are an active trader on an exchange with high commissions. Hence, it’s important to choose a crypto derivatives trading platform that balances low fees with platform reliability, strong trading technology, and highly rated customer service.
Number and quality of supported cryptocurrencies for options trading: If you are looking to trade a range of crypto options, you will need to choose an exchange that offers more than just BTC options.
Research tools: If you plan on trading Bitcoin options, you should use a platform that provides you with all the tools you need to set yourself up for success. Ideally, the trading platform should use a range of charting tools and options calculators, and highlight all aspects of each contract in a clear, easy-to-understand manner.
Storage and custody: Choose a trading platform that holds most, if not all, customer funds in cold storage. That greatly reduces the chances of losing funds due to an exchange hack. Moreover, if the exchange has additional wallet security features in place, such as withdrawal address whitelisting, that’s even better. Address whitelisting is a popular exchange wallet security feature that only allows crypto withdrawals to specific “whitelisted” external wallet addresses predetermined by the user.
Customer service: Ideally, you should also choose an exchange that has responsive, high-quality customer support. After all, it’s your money at stake, so if there are any issues with the platform, you need to be able to resolve them quickly with the help of the exchange’s support team.
Investing in cryptocurrencies, decentralized finance (DeFi), and other initial coin offerings (ICOs) is highly risky and speculative, and the markets can be extremely volatile. Consult with a qualified professional before making any financial decisions. This article is not a recommendation by Investopedia or the writer to invest in cryptocurrencies nor can the accuracy or timeliness of the information be guaranteed.
Are Bitcoin Futures the Same as Bitcoin Options?
No. Bitcoin futures are not the same as Bitcoin options.
Bitcoin futures obligate the buyer to purchase or the seller to sell a predetermined amount of Bitcoin at a specific price and date in the future. Conversely, Bitcoin options give the holder the right but not the obligation to buy or sell Bitcoin at a predefined price and date in the future. Therefore, options are more flexible than futures.
How Can You Hedge With Bitcoin Options?
Bitcoin options are an excellent investment product for hedging digital asset exposure.
For example, if you have a crypto portfolio composed of long positions in Bitcoin (BTC), Ethereum (ETH), Stacks (STX), Dogecoin (DOGE), and Solana (SOL), you could purchase Bitcoin put options with a 100% hedge ratio so that if the crypto market crashes and your portfolio drops in value, your profit on the BTC put options contracts would offset roughly all of your losses on your crypto portfolio.
Should the market not drop in this scenario, you will lose the money you paid for the options contracts.
Can You Trade Options on Crypto Exchanges?
Yes, but not on all exchanges.
Numerous digital asset exchanges provide crypto derivatives, including Bitcoin options, on their platforms. Notable examples include ByBit, Deribit, and OKX. There, you will find BTC options contracts with various strike prices and expiration dates, giving crypto traders the flexibility to execute complex options trading strategies.