Some cryptocurrency traders are big advocates of call options because of their ability to increase their Bitcoin holdings. While people know about futures and spot markets, options are not as widely known to many traders.
Let’s dive in and see what it’s all about.
What Are Call Options?
Call options are financial contracts that give the option's buyer the right, but not the obligation, to buy an asset, which in our case is Bitcoin. It has a predetermined price called the strike price and a specified period. The buyer makes a profit when the underlying asset increases in price.
Types of Call Options
There are two types within the Call Options category: the call option and the put option. Let’s see what they are.
- Call Option: This is the regular call option where the buyer has the right to buy Bitcoin at a strike price in the future. The biggest advantage is that it allows you to plan ahead regarding buying Bitcoin at a lower price. Additionally, the losses minimize since they are limited to the premium paid for the option.
- Put Option: This is the opposite of a long call option. This kind of options contract is mainly used by people who already own Bitcoin and are looking to sell it at a fixed strike price.
Why Are Call Options Beneficial?
People prefer to trade in Bitcoin call options for several reasons. Let's look at some of them:
- Fixed Risk: Your risk is limited to the premium amount paid for the option. Even when things don't go your way, you will not have to book more losses than what’s already paid. However, this is only applicable to buying call options, not selling.
- Reduced Volatility: Unlike spot/futures, you can use options and make profit while minimizing risk regardless of the direction the prices take.
- Flexible Strategies: Dealing with call options gives you the chance to be flexible in your trading strategies. Once you are familiar with the technical know-how, you can utilize multiple income-enhancing and risk-reducing techniques to boost your investment.
How to Invest in Bitcoin Call Options
Bitcoin options have been trading in different exchanges for a while now, and they had been unregulated previously. However, regulated institutions are allowing Bitcoin options trading. Not all exchanges that trade in Bitcoins allow Bitcoin options transactions. So, it is crucial to check before trading on that particular exchange.
Here are the three simple steps you need to follow to start trading Bitcoin options on CME Globex:
1. Register: This takes just a few seconds and requires only a verified e-mail address.
2. Fund Your CME Globex Wallet: Bitcoin and USDT are accepted in CME Exchange. When you register, a unique BTC / USDT deposit address will be generated for you.
3. Make Your First Trade: Now you're all set to trade in bitcoin call options.
Expiration on Call Option Contracts
Bitcoin is commonly referred to as CME bitcoin options. CME stands for Chicago Mercantile Exchange. It is implied that Bitcoin options price is taken from bitcoin futures (from CME) rather than the bitcoin spot rate. There are contract expirations for call options. CME lists six consecutive months of options. However, there can be two December contracts only if the current year's December contract is part of the front six consecutive listings.
Why Do People Invest in Bitcoin Options?
In line with the benefits of trading in Bitcoin call options, let's look at a practical, real-life example.
An investor buys a Bitcoin call option with a strike price of $10,000 for 0.05 BTC. This gives him the right to buy 1 BTC for $10,000. Let’s assume that at the time of expiration, the delivery price is $12,500. Hence, the option is settled for $2,500 pet 1 BTC.
At expiry, the option buyer's account is credited with 0.2 BTC ($2,500/$12,500), and the option seller's account is debited by 0.2 BTC. Since the purchase price amounted to 0.05 BTC, the investor's profit is 0.15 BTC.
Risk with Bitcoin Call Options
Volatility in bitcoin prices is something traders have to be mindful of when looking to invest in Bitcoin options. As speculative trades approach expiration, there is a higher demand for in-the-money and out-of-the-money options.
The former category options refer to the strike price being lower than the underlying asset's current price. The latter category of options refers to when the strike price is higher than the underlying asset's current price. This increased demand and relatively lower supply drive up the extrinsic value of options. In turn, this increases their implied volatilities.
The concept and estimation of implied volatility are crucial in trading Bitcoin call options. Traders use this to evaluate the market's opinion of Bitcoin's potential moves. Implied volatility estimation and analysis can make or break the trade, resulting in losses of great magnitudes if not assessed accurately.
Smart traders are aware of factors that affect a call option's value, such as strike price, time to expiration, implied volatility, and market volatility. They make informed decisions based on analysis and evaluation and believe the price of Bitcoin will increase.
Not only this, but traders use call options as part of a broader investment strategy. Combining these tactics and techniques can lower an investor's exposure and risk, attracting a larger investor base. With more platforms regularizing Bitcoin options trading, people are starting to discover its potential.