This week, CoinMarketCap dives deep into options in crypto and explains how to trade them on Bybit.
Table of Contents
- What are the options?
- Understanding options premiums
- Trading options in crypto
- Trading options on Bybit
- Concluding thoughts
Disclaimer: None of the content in this article is intended to offer financial advice in any way. Readers are encouraged to use their own discretion and do their own research before trading any financial instruments.
Diversification is the key to success and don’t put all your eggs in one basket — two of the most overused phrases in the financial markets. But apart from spot and futures in crypto, what options are available to fill your basket? Let us help you!
As the crypto industry grows, many people are trying new trading products to find the most profitable engine. Financial derivatives are a way to gain exposure to and/or speculate on the value of different assets.
An options contract gives investors the ability to buy and/or sell an underlying asset. Since this is an option contract, the investor is under no obligation to exercise the buy or sell order: rather, they have the “option” to do either. This freedom from liability makes options a preferred financial instrument for investors who wish to speculate on the value of an asset without purchasing the asset itself. As a result, options contracts are used to hedge the risks of buying an asset.
If an investor is feeling bullish on an asset, they can buy call options (which let them buy the asset) or if they are feeling bearish, they can buy put options (which let them sell the asset Let’s do it).
In this article, we will explain what the options are for newcomers. We will also go through ways to trade options on Bybit. Let’s dive into the definition of options first!
What are the options?
When you buy an options contract, you are effectively buying the right to “buy” or “sell” the underlying asset (such as a commodity or security):
1. At certain times
2. For a certain price.
But – to stress again – that is not a liability. You may choose not to buy or sell the contract, but the options contract will then expire.
To buy a contract, you pay what is known as a premium. This premium is what gives you the right to buy or sell the contract.
Let’s understand this better with an example. Suppose you are speculating on the price of fuel (petrol, let’s say) within three months. Due to current problems with logistics, you know the price is going to go up – and you believe it will go up by 25%. If the price per liter is around $5 today, you are expecting it to go up to $6.25. In this case, you can buy call options at $5 and set the right to “exercise” the call option after three months. And if the price rises to $6 after that period, you can exercise the right to buy at $5 and sell at a profit of $1.
This is roughly what option trading looks like. Note that this is the exact opposite of futures trading. Why? Because a futures contract commits you to buy an asset at a fixed price. Options, however, do not.
Options can be of different types. Most are usually listed on exchanges and can be traded by investors like you and me. However, some banks also provide special over-the-counter (OTC) options that are tailored for specific situations. These are usually underwritten by investment banks and are only available to accredited investors.
Understanding options premiums
Now that you understand what options are, let’s talk about the boring but important element called “options premium”.
When you buy any option contract, you pay what is known as the option premium. There are two factors that help determine the option premium: one is the option’s intrinsic value and the other is its time value.
The intrinsic value of an option is the amount you earn if you exercise your call/put immediately. And if you do, the difference between the price at which you exercise the option (called the exercise price) and the current price of the underlying asset is the intrinsic value.
Let us understand this with an example. Suppose you have call options on an asset worth $20. Since the current market price of this asset is $50, you can exercise the call option immediately and stand to earn $30 per share. Conversely, if the exercise price of your call option was $50 and the price of the underlying asset fell to $30, you would stand to gain nothing.
However, if you know that the asset price will recover one year after the decline, you might be willing to bet $5 more for a 1-year contract. In this case, the options premium will go up to $25.
Now that we understand the basics of options, let’s check how options are traded in the crypto market!
Trading options in crypto
Trading options in crypto is often considered a relatively cheap way to speculate on assets when compared to buying futures contracts.
In crypto, you can trade two different types of options:
American Style: These options can be exercised at any time before the expiration date of the contract.
European Style: These options can only be exercised on the expiry date of the contract.
These option agreements are usually created (or “written”) by the seller. They have a strike price (or the price at which the contract will be executed, whether it is a put option or a call option) and an expiration. They are then listed on the exchange.
The biggest difference between crypto and the traditional stock market is that the crypto market is open 24/7.
Now that we understand the basics of what options are and how they work, it’s time to really get our hands dirty and see how they work. Let’s check how you can trade options on Bybit!
Trading options on Bybit
Bybit offers a variety of option contracts. An important feature to remember for Bybit Options is that they offer European option contracts, which means you can only exercise your option contracts on the day/date they expire. Another thing worth noting for Bybit is that the option contracts they offer are cash settled – which means you never physically receive the underlying asset.
Here physical delivery of the asset means the actual transfer of the asset to your trading account.
Let’s discuss the steps to trade options.
Step 1: Access the options trading page on Bybit.
To access options contracts, go to the “Derivatives” tab at the top and select “USDC Options.”
You will be redirected to a page where you will see calls on the left and calls with their strike price on the right.
To best explain how calls and puts work, we’ll walk through how to buy both.
Step 2: Transfer money to Bybit.
If you haven’t already, you need to transfer some money to your Bybit account. With options trading, especially if you are doing it with small amounts, KYC may not be required. Be sure to check your location’s KYC regulations before trading.
You can use any wallet to transfer funds to your Bybit account. Just search for the deposit wallet address on Bybit and you will be able to transfer.
Step 3: Add funds to your derivatives account at Bybit.
The next step is to add funds to your derivatives account. To do this, go to “Assets” in the upper right corner of the screen. And then, click on “Transfer”.
You will be given the option to transfer funds from your “Spot” account to the “USDC Derivatives” account. Select the asset you want to transfer with the money, and the assets will be transferred.
Once you make the transfer, you will be able to see the amount reflected on the “USDC Options” page.
Step 4: Buying the call
Now, let’s buy a call. If you scroll down to the trading page, you’ll see that you can buy contracts that expire on specific dates along with other information such as the strike price. For the sake of this article, we will buy a call for July 22, 2022. Let’s choose a strike price of 20,000. Therefore, we will select this call.
When you select this call, you will see the trading screen open on the right. There is a lot of information on this screen – most of which is beyond the scope of this article. Thus, we will look at a few important things.
- The thing you see at the top called “BTC-22JUL22-20000-C” is the contract itself. This represents that the underlying asset of the contract is Bitcoin, which expires on July 22, 2022, and has a strike price of 20,000. Here “C” represents call.
- This is a tab that displays various types of technical data. What matters to us is the underlying price and implied volatility. The underlying price is the market price of the asset, and the implied volatility is how volatile the market is at the moment.
- This is where the actual purchase of the contract takes place. Now, the “price” here is the contract premium you are willing to pay.
As you can see, the person offering the contract has priced the premium at 1,020 USD.
Now, you can decide to reduce this premium as well.
Let’s say I’m willing to pay a USD 100 premium for the contract and the amount of BTC I want to buy (or the amount of BTC I want the right to buy) is 0.1. In short, I would pay $100 to get the right to buy 0.1 BTC for USD 20,000 on July 22, 2022.
Let’s go ahead and place this order. Once done, you’ll see it in your “Active Orders” above.
Buying A Put Option
Buying a put is similar to buying a call. Everything else will be the same except for the strike price.
Assume that on July 22, 2022, the price of BTC will fall to 18,000. Now, if we buy a put for 20,000, we will make a profit of USD 2,000 (minus the premium) because we will be able to buy the asset at a lower price and sell it at the strike price of 20,000. Let’s find a put with a strike price of 20,000.
The process of buying a put will be exactly the same. We will decide the premium we want to pay for the contract and the amount of BTC we want to buy. We are paying a premium of $100 for 0.1 BTC.
If you place an order, you will see it appear in your “Active Orders”.
Remember that if the put becomes unprofitable, you will only be losing your premium (since you are not using margin here).
Step 5: Canceling your calls/puts before expiry
Note that Bybit only offers European-style options. This means you can use these agreements only on the expiry date. If, however, you wish to close your call/put position first, go to the “Active Order” section and select the “Cancel” option. This will void your contracts.
Remember to fulfill the KYC requirements if you want to withdraw large amounts from any trading platform.
Concluding thoughts
Options trading is an interesting hedge for speculating on asset prices. The main advantage of trading options over other derivatives, such as futures, is that you are not obligated to buy the asset at the strike price. You only have the “option” to do so, which often makes options more attractive to entry-level traders who want to be protected from extreme volatility.
Although the losses are not that high (unless you are using leverage) and you only stand to lose the premium in most cases, options trading can be risky for those who are not exposed to the volatility of the crypto market. Not very familiar. As always, all readers are encouraged to do their own research before starting to trade any financial instruments.
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