How to buy and sell bitcoin options

As the demand for bitcoin and cryptos in general grows, so does the demand for more sophisticated means of trading them. Enter bitcoin options. Find out how bitcoin options work, why they’re becoming popular and the risks of bitcoin options trading.

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Please note, currently City Index does not offer bitcoin options. You can trade bitcoin with us via CFDs.

What are bitcoin options?

Bitcoin options work in the same as any other call or put option, where a trader pays a premium for the right—but not the obligation—to buy or sell a predetermined amount of an asset on an agreed date at a set price. They give investors and traders the opportunity to speculate on which way the price of bitcoin will move, without having to own the digital currency itself.

Want to trade bitcoin, but aren’t familiar with options trading? You can take a position on cryptocurrencies using CFDs – just like options, these enable you to take a position on bitcoin’s price without having to own the digital coin.*

Learn more about bitcoin trading via CFDs

How to buy bitcoin options

There are two types of bitcoin options you can buy:

  1. Call options. You’d buy a call option on bitcoin if you thought the price was going to increase beyond the set price you’ve chosen – known as the strike price – on or before the date of expiry. If your prediction was correct, you’d execute the contract at expiry, and take your profit. If your prediction was incorrect, you could let your option expire worthless and only lose the premium you paid to enter the trade
  2. Put options. You’d buy a put option on bitcoin if you thought the price was going to decrease below the strike price on or before the date of expiry. If your prediction was correct, you could profit but if you were incorrect, and the price of bitcoin increased, you’d let the contract expire and only lose the premium

Learn about options terminology

Bitcoin options are commonly referred to as CME bitcoin options, which simply denotes that the underlying price is taken from the Chicago Mercantile Exchange. These options take their price from bitcoin futures, rather than the underlying bitcoin spot price.

While bitcoin options have been available on major cryptocurrency exchanges since 2018, they have only been available since 2020 on CME. This decision is seen as another step toward bitcoin entering the mainstream. However, as bitcoin options are still a relatively new product – and are viewed by many with scepticism – it’s likely there will still be issues with liquidity and even meme-stock-like volatility.

Learn about Reddit stocks

Pros and cons of bitcoin options

When you buy a bitcoin option, your profit is potentially unlimited, while your risk is capped at the price of the premium. The profit for bitcoin options would depend on how far above or below your strike price the underlying settles at expiry.

Another core benefit is that options are derivative products. This means you’re not taking ownership of the digital currency itself but rather speculating on its future market price. So, you don’t have to worry about holding your bitcoin in a digital wallet and creating an account with an exchange. Instead, you can just use your regular trading account – provided your broker has a bitcoin options offering.*

Derivatives also enable you to go short on bitcoin, which you’d do if you thought the price would fall in the future. This creates a whole avenue of profit for traders interested in short-term speculation. You can also go long or short on bitcoin via CFDs; find out how.

But bitcoin options aren’t suitable for everyone. The volatility of bitcoin, added to the volatility of options, makes for an exciting market but also a risky one. Not only can price movements take a profitable option to an unprofitable one in the blink of an eye, but it makes opening a position extremely expensive.

As implied volatility rises, so does the price of an option. So, given that bitcoin is one of the most volatile markets out there, it’s safe to assume that bitcoin options will remain expensive until there is a fundamental shift in the underlying market.

Learn about options pricing and the Greeks

Also, while buying bitcoin options is limited risk, when you sell a bitcoin option – known as writing it – your loss could be unlimited. You’d receive the premium from the buyer for taking on this risk.

What time do bitcoin options expire?

Typically, bitcoin options expire on set monthly date in blocks of six consecutive months, with two extra expiries set for December. If the six months includes December, then there will only be one extra December contract.

When options contracts expire, it can have a huge impact on the spot price of bitcoin as investors close their positions and take new ones. For example, on March 26 2021, a record $6 billion worth of bitcoin options contracts expired, and the price subsequently rose following bullish market sentiment.

*Currently, City Index does not offer bitcoin options. You can only trade bitcoin with us via CFDs.

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