What are Bitcoin Options?

Bitcoin options are an increasingly popular way of taking a speculative view on the future price of bitcoin. The following graph of daily bitcoin options volume on the Deribit exchange from January 2020 to mid-January 2021 underline that view.

Bitcoin Options Volumes

The volumes provided by Skew reflect an extraordinary explosion in growth.

What are Options?

Options are derivative contracts that provide the holder with the right, not the obligation, to buy or sell the underlying asset at a specific price by a specific time in the future.

  • The specific asset under scrutiny here is a bitcoin.
  • The specific price is known as the ‘exercise price’ or the ‘strike price’.
  • The specific time in the future is known as the ‘expiry’.

Options come in many forms, e.g. most homeowners will have bought an option to sell their house to an insurance company in the event of irreversible damage. Amongst options nerds there is an unofficial competition to uncover the first ever option contract. Famous amongst them are Galileo and his telescope scanning the horizon for incoming merchant shipping. The scumbag would then ‘front-run’ the order and buy put options to ‘short’ whatever he guessed the merchants were carrying.

So that provides example of two put options: put options providing the owner the right to SELL the asset. Call options offer the holder the right to BUY something. On this site we are talking about the right to buy and sell bitcoins.

Bitcoin Options Instruments & Strategies

There are many different uses of bitcoin options. They can be used to speculate on the direction of the bitcoin price. Yet that can be achieved by trading bitcoin CFDs or bitcoin futures. What those instruments can’t do is:

  1. Let the trader take positions in a limited loss manner, and
  2. Let the trader take a view on whether the market will be more or less volatile in the future.

Pricing

Under the various sections on Instruments will be descriptions on:

  • how the price of options will change due to changes in the bitcoin price,
  • how the options price will change over time, and
  • how options prices change due to changes in the implied volatility.

Risk Management

Under this section of each instrument will be analysis of the ‘Greeks’. The Greeks are primarily the Delta, Gamma, Theta and Vega (although vega is a plastic ‘bubble’, not a real ‘Greek’ at all).

  • Delta: how the option price changes due to a change in bitcoin price.
  • Gamma: how the delta changes due to a change in the asset price.
  • Theta: how the option price changes over time.
  • Vega: how the option price changes due to a change in implied volatility.

Market Reports

With the help of exchanges  (deribit?) that offer options this site will cover the options markets in terms of volumes, open interest, and other titbits.