There is a reason that equity and index options trading volume has exploded over the past several years. Options are extremely valuable trading tools that offer investors unique strategies with flexible risk/reward possibilities.
Options can give defined risk and unlimited return to a potential buyer. Options can give buyers increased cost efficiency, as well-designed options strategies can replace more capital intensive strategies with similar risk/reward payouts. Options can offer valuable leverage to increase profits on a directional trade, whether traded with margin or without.
Deribit was the first bitcoin derivatives exchange to offer options on bitcoin futures, and the markets on Deribit continue to improve with increased liquidity and tighter bid/ask spreads than ever before.
Deribit offers bitcoin traders a toolset that can be used on a range of time frames with the flexibility for large and small traders alike. Options trading has become a staple in global markets for purposes of hedging risk, yield enhancement, and directional positioning, and the Deribit team has been involved in global options markets for years.
The options with the highest open interest on Deribit are the June 25,000 calls. Options with elevated volume this week were the June 10,000 and 11,000 calls along with the September 25,000 and 30,000 calls.
Check in with CryptoNinjas regularly for information about what options the big players are trading on Deribit.
We put together this example of a bullish bitcoin options trade. Next week we will present a bearish strategy.
Potential bullish strategy:
Bitcoin is trading $8300. Do you think bitcoin has the chance to trade much higher 5 months from now? Do you want to put on a long position with similar profit potential as buying 1 bitcoin without spending $8000? Are you tired of trading bitcoin futures and getting auto-liquidated by short-term volatility? Try buying 2 of the September 6000 calls for $3100 each. You spend $6200 which is $2100 less than buying one bitcoin, giving you extra capital to make other trades. Remember, Deribit is great for smaller traders too. This strategy can be executed with a buy of 0.2 calls instead of 2 calls.
Possible scenarios:
If bitcoin is trading $10,000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $8000. Your position is showing a $1800 profit. You can sell your calls for at least $8000 or you can roll your calls to December or a later month. If you had bought 1 bitcoin for $8300, your position would show a $1700 profit. The options strategy was slightly more profitable than buying 1 bitcoin and it cost less to make the trade.
If bitcoin is trading $12,000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $12,000. Your position is showing a profit of $5800. If you had bought 1 bitcoin for $8300, your position would show a $3700 profit. The options strategy was more profitable.
If bitcoin is trading $6500 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $1000. Your position is showing a loss of $5200. You can sell your calls or roll them to December or a later month. If you had bought 1 bitcoin for $8300, your position would show a loss of $1800, and you would still own the bitcoin with an intrinsic value of $5000. The options strategy was less profitable.
If bitcoin is trading $5000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $0. Your position is showing a loss of $6000. If you had bought 1 bitcoin for $8300, your position would show a loss of $3300, but you still own the bitcoin with an intrinsic value of $5000. The options strategy was less profitable.
If bitcoin is trading $1000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $0. Your position is showing a loss of $6000. If you had bought 1 bitcoin for $8300, your position would show a loss of $7300, but you still own the bitcoin with an intrinsic value of $1000. The options strategy is showing a smaller loss on the trade.
If bitcoin is trading $18,000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $24,000. Your position is showing a gain of $17,800. If you had bought 1 bitcoin for $8300, your position would show a gain of $9700. The options strategy was significantly more profitable.
If bitcoin is trading $25,000 the last week of September:
The intrinsic value of your 2-lot of September 6000 calls is $38,000. Your position is showing a gain of $31,800. If you had bought 1 bitcoin for $8300, your position would show a gain of $16,700. The options strategy was significantly more profitable.
Futures and options trading has large potential rewards, but also a large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures and options markets. Don’t trade with money you can’t afford to lose. This website is neither a solicitation nor an offer to Buy/Sell futures or options. No representation is being made that any account will or is likely to achieve profits or losses similar to those discussed on this website. The past performance of any trading system or methodology is not necessarily indicative of future results. Mentioning or discussing potential trade opportunities does not imply a recommendation to buy or sell those securities mentioned. This is not a blog/website about investment advice. It is for educational and entertainment purposes only.
Discussion about this post