Trading Bitcoin Options in 2021: The Risks And The Opportunities

Bitcoin had an excellent 2020, to say the least. It is currently on a bull-run bigger than the last one in 2017, and this time with institutional support backing it up. This is the closest the cryptocurrency community has gotten to global adoption since its inception in the year 2008. However, Bitcoin trades close to $47000 (as of February the 9th,2021), and there are no visible signals that the prices are about to drop any time soon. Granted, the volatility surrounding the market has somewhat stabilized over the years, but the fact of the matter is that Bitcoin is a pretty volatile asset to hold. 

If you’re looking to profit off this bull-run while hedging your risks against volatility or want to be exposed to the price changes without having to actually purchase Bitcoin – trading Bitcoin options might just be what the doctor ordered. 

Why Bitcoin Options?

Bitcoin can be a pretty volatile asset, despite its volatility having reduced over the last few years. This volatility can be witnessed, even in the current bull run, and as recent as January 2021. 

Consider the numbers. Bitcoin dropped 10% (USD 40,000 to 36000) over a period of 2 days, from 8th to 10th of January, reached low at the 12th (USD 34000), rallied back up till 14th (to USD 39,000). 

Then it proceeded to crash to USD 30,000 on 27th and rallied back up to  USD 37,000 on the 4th, and in a 5 day time period, it gained another USD 10000 to trade at USD 47000 now. 

We could continue to provide more evidence, but you get the gist.

Bitcoin derivatives, options, in particular, can be an effective tool to help minimize losses arising from price volatility. Hedging through options, such as Delta hedging and Gamma hedging, are effective strategies to help you keep volatility in check. 

Another important advantage of utilizing Bitcoin options is the opportunity provided to speculate on the price movements and be exposed to Bitcoin without actually having to pay up USD 47000 to purchase a bitcoin. 

Options can be sold and traded at a fraction of the price and will allow you to profit provided you strategize optimally. The story of a pseudonymous trader(s) gaining a whopping USD 3,816,000, went viral recently, thanks to a well-placed 16,000 out of the money options trade, for just USD638,400 (one contract was listed at USD 39.90).

The Associated Risks

While it is true that Bitcoin options can serve as wonderful hedges and as a speculative tool, it does come with associated risks, as with any other financial instrument. Depending on whether you’re an options holder or a writer, you take on different degrees of risks. 

With options, it is possible that you have the possibility to lose more than what you’ve invested. This is especially the case with writing uncovered calls, where the risk of loss is potentially unlimited.

The initial investment in Bitcoin options is bound to be much lesser than an equivalent position in Bitcoin. This also means that your potential losses holding Bitcoin options would be lesser than if you had bought or shorted Bitcoin. If your options fall short of the strike price, it will be worthless, and the premium you paid would be lost. 

Ensure to thoroughly understand these risks before investing in Bitcoin options, or any other financial instruments for that matter. The OCC’s “Characteristics and Risks of Standardized Options” is an amazing resource that helps you better understand the associated risks with trading options. If you’re new to trading crypto derivatives or overwhelmed by the different concepts, know that you’re not alone. We, at Delta understand the difficulties you might face and provide you with resources such as our user guide, to help you take the first steps in your journey of trading crypto derivatives. Welcome to the Delta family!