Trading cryptocurrency options can be a great way to potentially profit from the volatility of the crypto market without having to buy the underlying coins. However, options trading also comes with significant risk if you don’t understand how it works. This comprehensive guide will walk you through everything you need to know to start trading crypto options.
What Are Cryptocurrency Options?
A cryptocurrency option is a contract that gives you the right, but not the obligation, to buy or sell a crypto asset at a predetermined price on or before a specific expiration date. There are two types of options:
- Calls — Give you the right to buy crypto.
- Puts — Give you the right to sell crypto.
When you buy an option, you pay a premium upfront. Your profit/loss depends on the difference between the strike price and market price at expiration or settlement.
Benefits and Risks of Trading Crypto Options
Crypto options provide leverage and can magnify profits compared to just owning the underlying asset. However, they come with significant risk:
- Leverage provides larger profit potential.
- Ability to hedge spot positions.
- Define maximum loss (premium paid).
- Options expire worthless if market move is wrong.
- Significant loss potential with leverage.
- Complex pricing and Greeks.
How to Get Started Trading Crypto Options
Follow these steps to start trading crypto options:
1. Choose a Reputable Exchange
Select an exchange like Deribit or FTX that offers robust options trading. Meet their account minimums and get set up.
2. Fund Your Account
Deposit cryptocurrency from your wallet into your account balance to cover margins.
3. Learn Option Strategies
Study basic strategies like calls, puts, spreads, straddles, strangles, iron condors etc. Understand how profits are realized.
4. Use Paper Trading
Virtually trade options using demo accounts to test strategies risk-free. Master this before using real capital.
5. Start Small
Execute low-cost trades to begin. Slowly increase position sizes as you gain experience.
6. Manage Risk
Calculate position sizing based on risk tolerance. Use stop losses. Don’t overleverage account.
7. Monitor Closely
Actively manage trades around volatility, time decay, approaching strikes.
8. Record Trades
Track strategy outcomes to identify what works best for future trades.
How to Buy a Call Option
Here is the process for buying a basic call option:
- Choose the crypto asset you want to trade (e.g. Bitcoin)
- Pick an expiration date in the future (end of week, month etc.)
- Select a strike price above current market price
- Buy call option contracts at the premium quoted
- Wait for expiration date to see if asset price rises above strike
- If it does, option will be «in the money». Exercise to buy asset at strike.
- Sell purchased asset at higher market price for profit.
How to Sell a Put Option
Selling a put involves slightly different mechanics:
- Select crypto asset and expiration date
- Choose strike price below current market
- Sell put option contracts and collect premium
- If price stays above strike, option expires worthless for profit
- If price falls below strike, buyer exercises put
- You’re obliged to buy asset at higher strike price
- Sell purchased asset at lower market price for loss
Things to Remember
Here are some key tips for crypto options trading success:
- Closely monitor «Greeks» like delta, theta for pricing impact.
- Give yourself enough time for trades to play out.
- Don’t invest more than you can afford to lose.
- Use spreads and combinations to define risk.
- Keep detailed records for strategy analysis.
- Stay up to date on crypto news/events.
- Use stop losses and discipline for risk management.
Cryptocurrency options provide a way to leverage crypto volatility and hedge portfolios. However, they involve significant complexity. This guide covers the key steps including choosing an exchange, understanding options strategies, managing risk, and executing basic buys and sells. Mastering paper trading is essential before putting real capital at stake. With proper education and discipline, crypto options present attractive trading opportunities.