Bitcoin Options Are Exploding as Investors Flock to Crypto, Here’s What You Need to Know

| Publish date: 08/16/2020 (Last updated: September 07, 2020 07:04 AM)
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Bitcoin options are taking over as the newest preferred way to invest. Signaling an increase in trade demand and market interest.

Interest in bitcoin has certainly soared from its humble origins, just over a decade ago- After mass adoption in 2017, the market seemed resolute on sticking to a prolonged bull run, leaving many fearing that interest had peaked. Following the market shakeout in March, bitcoin came back to perch once again at a modest $9,500 price point, swaying little above or below it for weeks on end.

In the last month, however, bitcoin is once again achieving what many skeptics had thought to be impossible. Continued market evolution and technological advances have started to peak interest in the most unlikely sectors- include centralized finance and governments. The bitcoin network itself has started discussing the incorporation of traditional financial schemes- like lending and derivative investing- into the network, which may serve to account for the recent rise in interaction among new users and existing wallets.

The network is quite cleverly adapting to investors desires, with trader focused exchanges like Bitvavo helping novice traders sort through the technicalities of the market itself as well as new and exciting investment strategies that are aimed at more competent traders. Futures, swaps, options, and margin trading have all started to take hold alongside other traditional trading practices like lending and diversification of blockchain use. Helping to keep the market from stagnating the interests of all levels of investors.

What Are Bitcoin Options All About?

Of all the bitcoin derivatives that are currently being traded, options seem to be the most sought after at this point. Options are. A form of financial investment that gives a trader the right, but not the obligation, to buy or sell a specific stock or asset at a specific “strike price”. Essentially, it’s a contract that allows users to enter into an agreement specifying interest in buying crypto at a certain price, within a certain time limit. This means that the only money that must be spent on an option is that of the call or put contract itself, called a “premium”.

Should the asset not behave in the way that an option trader believes it will- there’s no obligation to purchase that stock during the time constraints of the option. So in the worst case scenario, a trader is out the cost of the option. Which are generally much cheaper than buying a stock outright.

Bitcoin options allow traders to speculate on where they believe the future of the market is heading. Whether up or down (“call” and “put” options respectively). This allows traders to invest in the volatility of the coin, as opposed to investing in the coin itself. Which can serve to make savvy traders quite a lot of money, while protecting the less than well informed from losing their shirts. Historically, bitcoin has shown a wildly volatile price, making it an exceptionally enticing option to buy.

Know Your Greeks

The Greeks are factors that influence premium pricing, or how much an option should reasonably cost based on certain market factors. These factors become incredibly important if you plan on buying or writing options. They will influence and corroborate fair pricing structures. Particularly with bitcoin as the market is usually highly volatile.

Delta

Perhaps the most important signifier when it comes to impact on options value. This Greek identifies how much an options premium may change if the underlying price changes by one dollar. It also estimates the probability that the option will expire in the money. The lower the Delta, the lower the likelihood the option will expire in your favor.

Gamma

Gamma measures Delta’s expected rate of change.  For every one point the underlying bitcoin market moves, Delta’s price will be increased by Gammas value.

Theta

Theta estimates how much value will be lost daily. With Theta working in favor of writers, or sellers of options.

Vega

Estimates how much the premium will change with an estimated one point in implied volatility. Depending on what causes the future volatility, and whether a call or put option is purchased, a high Vega could be in favor of the option buyer.

Rho

Rho identifies how much an options premium may move if interest rates change. As rates change slowly, Rho is often left out of considerations of options, as most options do not span long periods of time.

 

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