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Bitcoin and Ethereum Options Trading at Deribit and FTX

Have you ever tried leverage trading bitcoin, ethereum or any other altcoins? Are you often right about the market direction but get stopped out or liquidated before the trade goes in your favor?

With trading options you can long/short bitcoin or ethereum but without getting liquidated ! Yes you won’t get liquidated by the noise in the market. Also no funding rate. In this article I’ll teach you the basics of options trading. I decided to write this article since a lot of articles about option trading is confusing. They often give some investopedia definition on options which doesn’t make it any simpler. Neither do they explain how to actually make the trade and what to look for.

But here’s the great part. Lets say you make this bet when Bitcoin price is at $9k, and somewhere in April it’s at $15. You’re in profit because the price is way above $9k and you can actually close the trade. You don’t have to wait till may/expiration date.

Options can also be used to buy/sell volatility. It can be a good strategy for example when volatility is high, you can make a killing by making a put. When volatility is low, you can make profits by making a call.

Why aren’t people trading options if this is all so great? It’s not really as marketed by traders as futures and there’s this misconception that you can’t close your option trade before expiration date and that the “strike price” has to hit. Which is a misconception too.

In margin/leverage/futures you can go long. Long (That green buy button) if you expect the price to go up. In options instead of long, you buy a “call”. So when you buy a “call” you’re betting that the market goes up.

In margin/leverage/futures you can go short. Short (That red sell button) of you expect the price to go down. In options instead of going a short, you buy a “put”. So when you buy a “put” you’re betting that the market goes down.

If you’re betting that the market price of bitcoin is going to be higher than $12000 before June 26. You buy a “call”.

This target price is $12000 is named a “strike price” in the option world.

If you’re betting that the market price of bitcoin is below $7000 or lower before June26. You buy a “put”.

This target price you have of $7000 is called the “strike price”.

Reminder that the “strike price” doesn’t have to get hit. If you buy “calls” when the btc price is at $9600 and it hits $11000 before June 26, you are in profit and free to either take profits or continue to wait.

You may wonder well if the price is at $10k, why not buy a call or put at 10000 but notice the bid and ask price. This is the “premium” you pay. The premium is basically your cost to buy the option. You will be in a loss automatically. Same with futures, you don’t have to market buy. You can use limit orders.

You could bid very low with a limit order but notice the volume with a strike price of 6000. No volume at all. Even if you get a good entry, there needs to be someone on the other side to fill your order.

When the market is calm, volatility is low, when the market is not calm, implied volatility is high.

IV (Implied volatility) is the expected future volatility of the price that is implied by option prices (premiums).

In the equity market, rising stock prices lead to lower implied volatility, as optimism reduces the equity market’s expectation of risk and hence price variation. When equity markets go down, implied equity market volatility tends to go up.

https://medium.com/@ThinkingUSD/deribit-bitcoin-options-and-volatility-b370ba276761

With options your risk can be small but your reward can be big.

Low probability trades can payout a lot.

The higher the risk, the higher reward. You may lose a few times but 1 good play can make a lot.

Now let’s say we’re betting that the price of bitcoin will be 12000 or higher before March 27.

In this case we want to buy a “call” with a “strike price” of 12000 27 Mar 2020. To buy a quantity of 1 BTC our buy margin/premium (our cost which is also our max loss) is 0.0235 BTC.

(If you want to buy a put, you buy BTC-27MAR20–12000-P. Do not press sell on BTC-27MAR20–12000-C because then you’re shorting a call. Which is something else)

Deribit

When the strike price is slightly above 12000 you can see we make $883 and our max loss is the premium $246 (0.0235 BTC actually when the index price was $9629.67)

If the market price of bitcoin/price of bitcoin on Deribit (Lets call this index price)

If the index price is way above $12000, your profit will be much higher. If the price is above $14000, your profit will be $2270. Which is almost a 10x on your bet!

(This is a little bit more advanced, consider skipping this if you never heard about hedging and don’t want to confuse yourself.)

Now let’s say you also want to trade futures.

You decide to long 2500 contracts and for sake of simplicity you’re one of those traders who doesn’t add to position. When the price hits $12000 you make $627 and when the price hits $8000 you lose around $420. (Not calculating the funding rate). With 5x leverage, a price close $8000 is your liquidation price.

Now let’s say you know you know you can be terribly wrong and want to manage that by buying a put with a strike price of $8000. You decide to buy a put with a size of 2 which is $274. If the price falls slightly below $8000 you make $900 and your max loss is $274.

Futures profit-option loss = 627 -274 = $353 profit

option profit-futures loss = 900–420 = $480 profit

You buy puts or calls. You don’t click “sell” on puts or calls unless you already bought them and it’s only meant to close your position. When doing that, please check the box “reduce only” and make sure it’s checked. There’s something in options that’s called shorting calls and shorting puts but that’s beyond the scope of this article/tutorial.

Back in December when price when ranging between $6.5k and $7.5k I was waiting for $5.8k which was stupid since it was very close to the range and I took the risk to miss out. Back at the time I didn’t really understand options but what I should have done was buying BTC option calls. The implied volatility was really low. Simply waiting for a lower price to hit or maybe not was not the best. I should have bought options. That way I wouldn’t get liquidated and I was bullish in the overall trend. Back in July when implied volatility was high and I felt price topped out. Ranging below $10k-12k I should have bought puts. But this is how you can play options. When you’re sure about the direction but don’t want to take the risk of getting liquidated by the noise.

Why stack sats if you can stack calls ?

Here’s someone who actually did it right when I lacked the understanding

What a legend

You could also buy a call for example if your technical analysis gives a buy signal. For example your EMA lines crossed, your StochRSI is low, your MACD weekly is crossing or your Renko or Heikenashi shows the trend is still strong. You can buy a “call” and not worry about the noise, flash crashes or scam candles.

on OKEx it’s also possible to trade options.

On Deribit there is level 0 and level 1 KYC. For level 0 you can withdraw up to 1 BTC per 24 hour and for level 1 it’s unlimited. For level 1 you have to show proof. For level 0 you don’t have to show proof. You don’t have to upload your goverment ID so technically you can just lie *wink wink

If you are looking for more medium articles like this written by me. You can find them here: https://medium.com/@romanornr/

Originally published at https://medium.com on February 25, 2020.

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