A complete introduction to crypto options trading for beginners. Learn crypto options, key trade phrases, and how to start trading them.
If you’re new in the cryptocurrency market and want to maximize your profits, this comprehensive guide on crypto options trading for beginners is just what you need. Cryptocurrencies present both opportunities and challenges for traders, but by using the best crypto options trading platforms (like Binance, Bybit, and HTX), you can navigate them.
Crypto Options: What Are They?
Financial contracts, or cryptocurrency options, give traders the “option” to purchase or sell a digital asset at a given price before a predetermined expiration date. Holders are free to choose whether to use (or “exercise”) the option, but those who sell (or “write”) these contracts are legally bound.
Options stand for prospective ownership rights instead of spot cryptocurrency trading, which entails direct ownership of digital assets. Since options’ value is based on cryptocurrency, they fall under the financial category of “derivatives.” Because of the flexibility, traders can predict price changes without keeping cryptocurrency in wallets or exchange accounts. Instead, cryptocurrency options exchanges hold these contracts on the traders’ behalf.
There are two kinds of cryptocurrency options: put options and call options. Each is appropriate for various market perspectives:
Before the contract expires, holders of call options can purchase a cryptocurrency at a fixed price. Calls increase in value as the price of the underlying cryptocurrency rises and are typically linked to upward (or bullish) market expectations.
Before the contract expires, options will enable traders to sell cryptocurrencies at a fixed price. In downward (or bearish) markets, traders frequently employ put positions to profit by selling at a price higher than the asset’s falling value.
Key Phrases for Cryptocurrency Options Trading
It’s a good idea to become familiar with some of the terms used in crypto options trading for beginners before you start trading. You can better understand your rights and the profitability of your position by learning the definitions of these terms.
The strike price is the set price at which traders consent to purchase or sell a digital asset. For instance, a Bitcoin (BTC) call option with a $100,000 strike enables traders to buy Bitcoin at $100,000 for the contract term.
Expiration: The day a contract for options expires and becomes inactive. Also known as the “expiry date,” this establishes the trade’s timeframe.
Premium: The amount traders must pay to buy an options contract. As an alternative, option sellers get paid upfront, but if the buyer exercises their rights, they still have to carry out the terms of the contract.
The positive difference between a cryptocurrency’s market and strike prices is its intrinsic value. For instance, the intrinsic value of an Ethereum (ETH) call option with a strike of $3,500 and ETH trading at $3,600 is $100. Since options cannot have a negative intrinsic value, it defaults to zero if this value is negative.
Extrinsic value: The amount of an option’s premium is affected by variables other than intrinsic value, like market sentiment, volatility, and expiration time.
In-the-money (ITM): When an option is profitable, it is ITM. This happens with call options when the market price exceeds the strike price. It occurs for put options when the market price exceeds the strike price.
Out-of-the-money (OTM): When an option is not profitable, it is OTM. This indicates that the market price is below the strike price for call options and above the strike price for put options.
How to Trade Cryptocurrency Options For Beginners
Here is a detailed how-to for getting started in crypto options trading for beginners:
1. Select an exchange for cryptocurrency options
To choose the best platform for your needs, look for a trustworthy exchange that accepts cryptocurrency options contracts. Then, compare features like fees, liquidity, and support assets.
Some top cryptocurrency options trading platforms are listed under the derivatives tab of websites such as CoinMarketCap. The well-known centralized exchanges (CEXs) for trading options are OKX, Binance, and Deribit.
2. Create and add money to your account.
Complete the setup procedure, which might involve know-your-customer (KYC) identity verification, after creating an account on the cryptocurrency options exchange of your choice. You can begin trading when you add money, whether in fiat or cryptocurrency.
3. Begin by selecting single-leg options.
Basic single-leg options strategies, which entail purchasing a single call if one expects an asset’s price to rise or a single put if one expects a price decline, are frequently the first strategies novices use. This simple approach offers a starting point for comprehending how options contracts function and how changes in the market affect their value.
4. Check sophisticated tactics
It is necessary to assume the responsibility of carrying out the contract terms when writing options (or selling contracts rather than purchasing them).
Iron condor or multi-leg strategies combine two put and two call options with varying strike prices. By limiting possible risks and returns and establishing a price range for the underlying asset, these strategies seek to benefit from low volatility.
5. Take charge of your trades
Consider “rolling” your position if a trade doesn’t work out. To increase the trade’s potential, rolling entails terminating the existing options contract and starting a new one with a later expiration date. It’s similar to “kicking the can down the road,” which lets you hold onto your positions and bide your time until the price improves.
