The undisputed king of the Cryptocurrencies “Bitcoin” has not budged for its place even in this crazy economic turmoil; as a result, Bitcoin options trading seems to gain favor amongst crypto fans.

There was a time when many crypto fans felt dejected as they could not make most of Bitcoin when it was within their reach. They were sad when they saw that the price of Bitcoin had appreciated to 68,000 USD.

Although most could not buy Bitcoin due to price constraints and given the price at which the price of Bitcoin seems to trend, many have explored another option to make a Profit using financial derivatives like “Options Trading.”

If you are unaware of “Options Trading” and wish to enter the crypto market to make a substantial profit, then the article is just for you. This article will explore how options trading can enhance your profit capabilities without buying or purchasing Bitcoin.

We look at the terminologies involved while trading Bitcoin in the crypto market using derivatives such as options trading. 

Terminologies used in Options Trading.

Options Trading: It is a contract between the buyer and the seller where the buyer has the right to buy the underlying asset on a fixed date.

The buyer is not obliged to buy the underlying asset.

Underlying Asset: The financial assets that form the basis of a derivative’s price are known as underlying assets.

Lot size: The number of underlying assets bought in a single transaction. Lot sizes can also be bought in multiples.

Call Option: When investors exercise the option of buying is called “Call Option.” 

Put Option: When the investor exercises the option to sell is called a “Put Option.”

Strike Price: When a contract enters at a predetermined price in the future is called “Strike Price.”

Spot Price: The underlying asset’s price on the day the Contract expires is called “Spot Price.”

Premium: The minimum price required for the underlying asset while entering into an Options Trading contract. 

Expiry Date: The date on which the Contract ends is called the Expiry date.

Now that we are well versed with the terminologies, we shall understand “Options Trading.”

What is Call Option Trading?

Options Trading is a contract between the buyer and a seller that has an expiry date in the future. Although the Contract also specifies the Strike Price of the underlying asset, the buyer has the option of entering the Contract with the seller with a predetermined Lot size.

The buyer can choose the Lot size before entering the Contract. However, instead of paying the entire price of the underlying asset, the buyer has to pay a premium, the minimum price of the underlying asset, before entering into the Contract.

Two scenarios can take place on the expiry date of the Contract.

  • The underlying asset’s Spot Price will be higher than the Strike Price.
  • The underlying asset’s Spot Price will be lower than the Strike Price.

The investor will either make a profit or a loss based on the above two scenarios.

How does Call Option Trading work?

While in Bitcoin Options Trading, you as an investor would like to buy or “Call” the underlying asset at a lower price before selling it at a higher price.

Consider two parties entering a contract, X and Y. “X” is the buyer while “Y” is the seller. “X” has the option to buy Bitcoin but is under no obligation.

Let us consider that the price of the Bitcoin currently trending in the crypto market is USD 12,000, and the Contract will expire after three months, i.e., in December, at a strike price of a single Bitcoin is USD 14,000. 

“X” expects the price of Bitcoin will surge as per “X’s” research.

Per the Contract, “X” has to buy a single lot of “3” Bitcoins. It is challenging for “X” to raise such capital; however, as per the Contract, “X” can enter the Contract by paying Premium, which is 2% of the Lot size.

So “X” enters into the Contract by paying Premium, which is 2% of USD 42,000 

Premium paid by “X” = ( Price of the Bitcoin X Lot Size)

                                                                          2%

                                         = ( 12,000 X 3)

                                                       2%

                                         = USD 720.

Thus “X” has to pay USD 720 to enter into the Contract. 

What will occur at the end of the Contract?

When December comes, there are two scenarios, either the Spot Price of Bitcoin will exceed USD 14,000 or below USD14,000.

Scenario 1: When the Spot Price exceeds the Strike Price (USD 14,000)

Suppose the Spot price of Bitcoin is trending at USD 16,000, which is USD 2,000 more than the Strike Price of USD 14,000, “X” will refrain from exercising the buying or Call option. At the same time, “Y” would love to sell.

“X” exercises Call Option = [(Strike Price X Lot size) – (Spot Price X Lot Size] – (Premium paid)

Profit of “X” = [(14,000 X 3 ) – (16,000 X 3)] – 840

                       = [(42,000) – (48,000)] – 840

                       = 6,000 – 720

                       = USD 5,180 

The total Profit made by “X” is USD 5,180.

However, the Spot Price of Bitcoin could even go higher, say $20,000, 

So the Profit now increase to = [(14,000 X 3) – (20,000 X 3)] -(840)

                                                      = [(42,000) – (60,000)] – 840

                                                      = 18,000 – 720

                                                      = 17,180

Thus for “X,” the Profit is limitless; the greater the Spot Price, the greater the profit margin.

Scenario 2: When the Spot Price is less than the Strike Price.

Suppose the Spot price of Bitcoin is trending at USD 9,000, which is USD 5,000 less than the Strike Price of USD 14,000, “X” will refrain from exercising the option of buying. “Y” would be at a Profit.

If “X” had an obligation, the Loss would have been = [(Strike Price X Lot size) – (Spot Price X Lot Size] – (Premium paid)

Loss of “X” = [(14,000 X 3 ) – (9,000 X 3)] – 720

                       = [(42,000) – (27,000)] – 720

                       = 15,000 – 720

                       = USD 14,180

The total Loss made by “X” is USD 14,180.

However, the Spot Price of Bitcoin could even go lower, say USD 2,000, 

So the Loss now increase to = [(14,000 X 3) – (2,000 X 3)] -(720)

                                                      = [(42,000) – (6,000)] – 720

                                                      = 36,000 – 720

                                                      = $ 35,180 USD

Thus, the lesser the Spot Price greater the Loss for “X.”

What is Put Option Trading?

While in Bitcoin Options Trading, you as an investor would like to sell or “Put” the underlying asset at a higher price instead of selling it at a lower price in the future.

“X” has the right to buy but is not under any obligation to buy Bitcoin.

“X” expects the price of Bitcoin will go down or remain the same as per “X’s” research.

Again two scenarios can take place on the expiry date of the Contract.

  • The underlying asset’s Spot Price will be higher than the Strike Price.
  • The underlying asset’s Spot Price will be lower than the Strike Price.

The investor will either make a profit or a loss based on the above two scenarios.

How does Bitcoin Put Option Trading work?

Consider two parties entering a contract, X and Y. “X” is the buyer while “Y” is the seller.

Let us consider that the price of the Bitcoin currently trending in the crypto market is USD 10,000, and the Contract will expire after three months, i.e., in December, at a strike price of a single Bitcoin is USD 8,000. 

Per the Contract, “X” has to buy a single lot of “3” Bitcoins. Therefore, it is challenging for “X” to raise such capital; however, as per the Contract, “X” can enter the Contract by paying Premium, which is 2% of the Lot size.

So “X” enters into the Contract by paying Premium, which is 2% of USD 30,000 

Premium paid by “X” = ( Price of the Bitcoin X Lot Size)

                                                                          2%

                                         = ( 10,000 X 3)

                                                       2%

                                         = USD 600.

Thus “X” has to pay USD 600 to enter into the Contract. 

What will be the conclusion of the Contract?

When December comes, there are two scenarios, either the Spot Price of Bitcoin will exceed $8,000 or below $8,000.

Scenario 1: When the Spot Price exceeds the Strike Price (USD 8,000)

Suppose the Spot price of Bitcoin is trending at USD 14,000, which is USD 6000 more than the Strike Price of $8,000, “X” will refrain from exercising the option of buying. 

If “X” had an obligation, the Loss would have been = [(Spot Price X Lot size) – (Strike Price X Lot Size] – (Premium paid)

Loss of “X” = [(14,000 X 3 ) – (8,000 X 3)] – 600

                       = [(42,000) – (8,000)] – 600

                       = 44,000 – 600

                       = USD 43,400

The total Loss made by “X” is USD 43,400.

However, the Spot Price of Bitcoin could even go further, say $20,000, 

So the profit now increase to = [(20,000 X 3) – (8,000 X 3)] -(600)

                                                      = [(60,000) – (24,000)] – 600

                                                      = 36,000 – 600

                                                      = 36,400

Thus for “X,” the Profit is limitless; the more significant the Spot Price, the greater the profit margin.

 “X” will exit the Contract by paying the Premium USD 600 rather than more.

Scenario 2: When the Spot Price is less than the Strike Price.

Suppose the Spot price of Bitcoin is trending at USD 5,000, which is USD 3,000 less than the Strike Price of USD 8,000, “X” will exercise the option of buying. 

“X” exercises Put Option = [(Spot Price X Lot size) – (Strike Price X Lot Size] – (Premium paid)

Profit of “X” = [(5,000 X 3 ) – (8,000 X 3)] – 600

                       = [(15,000) – (8,000)] – 600

                       = 6,000 – 600

                       = $ 6,400 USD

If the spot price falls further, say USD 2,000, then.

So the profit now increase to = [(2,000 X 3) – (8,000 X 3)] -(600)

                                                      = [(6,000) – (24,000)] – 600

                                                      = 18,000 – 600

                                                      = 17,400

Advantages of Options Trading:

There are two major advantages of Options Trading that attract cryptocurrency investors. First, as a Contract buyer, the chance to maximize Profit is limitless. One can conclude that the sky’s the limit.

Second, the chance of making a loss is limited. Thus you can make substantial money by entering into Bitcoin Options Trading.