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How to Bet on Bitcoin Volatility Using Bitcoin Options

How to Bet on Bitcoin Volatility Using Bitcoin Options 101
Source: iStokc/gopixa

Even though bitcoin volatility has decreased substantially over the past decade, the world’s leading digital currency is still more volatile than traditional assets. While that may make some investors nervous, it offers an excellent opportunity for volatility traders.

For example, this week, in response to "growing interest" in crypto and customer demand, derivatives giant CME Group said it aims to launch options on bitcoin futures in the first quarter of 2020. Meanwhile, bitcoin options are already available on trading platforms such as LedgerX, Deribit, and Quedex. Two of the crypto industry’s behemoths - BitMEX and Binance - are also planning to launch bitcoin options trading in the near future.

While derivatives trading is not for beginners, in this guide, you will learn some basics on how to trade the volatility of bitcoin using two popular options trading strategies: straddle and strangle.

What are options?

Options are financial derivatives that provide the holder with the right but not the obligation to buy or sell an asset at a specific price on a predetermined date. As such, options enable speculators to bet on a price rise or decline of an underlying asset using leverage.

For example, if you believe the price of bitcoin (BTC) will exceed USD 12,500 by September 27, 2019, you could purchase a bitcoin call option on Deribit. As you can see on the screenshot below, a bitcoin call option with a strike price of USD 12,500 costs 0.0015 BTC (USD 15.35) at the time of writing.

How to Bet on Bitcoin Volatility Using Bitcoin Options 102
Source: Deribit

If the price of bitcoin unexpectedly rises to a new 2019-high and exceeds the USD 12,500 strike price, your purchased call option would be “in-the-money.” Your profit is the difference between how much the price of bitcoin has exceeded the strike price minus the cost of the call premium (the price of the option).

Using options, traders can also place market-neutral bets on the future volatility of an asset, such as bitcoin. That is what we will discuss below.

How to buy a straddle to go long bitcoin volatility

A straddle is a market-neutral options trading strategy that involves buying a call and a put with the same strike price and the same expiry date.

When putting on this strategy, you buy both the put and call “at-the-money,” which means where the price of the underlying asset is trading now. You profit, once the price of the asset moves sharply (and more than the cost of both the put and the call premiums). Thereby, you can bet that the volatility of an asset will increase.

For example, if you expect the volatility of bitcoin to increase in the coming week, you could buy “at-the-money” calls and puts with a September 27 expiry date for 0.0305 BTC (USD 311.56) and 0.0340 BTC (USD 347.26).

If the price of bitcoin then moves more than USD 658.82 up or down, your “long straddle” position will be in profit. If the price rallied aggressively, you would generate a profit on the call option and lose the premium of the put option and vice versa.

Buying a straddle is a popular options trading strategy in the forex markets ahead of important, potentially market-moving announcements or economic data releases that are expected to cause volatility in the currency markets.

How to buy a strangle to go long bitcoin volatility

If your conviction about an increase in bitcoin volatility is stronger, you could also buy a strangle. A strangle is a market-neutral options trading strategy that involves buying a call option and a put option with the same expiry dates but with different strike prices.

For example, if you believe the price of bitcoin is about to experience severe market swings but are unsure of the direction, you could buy a bitcoin call option with a strike price of USD 10,500 for 0.0205 BTC (USD 209.21) and a put option with a strike price of USD 10,000 for 0.0240 BTC (USD 244.92) for a combined price of USD 454.13.

If the price of bitcoin then swings aggressively in one direction or another, by over USD 454.13 above the call strike or below the put strike, your long strangle will be in profit.

A strangle is a cheaper market-neutral strategy than a straddle, but it is also riskier as the chance is higher than both options expire worthless if the price of bitcoin does not experience a severe volatility spike.

These examples illustrate how you can use bitcoin options strategies to bet on the price volatility of bitcoin. However, it is important to note that bitcoin options trading is not for beginners.

If you want to trade bitcoin using options, you will need to become acquainted with concepts and terms such as implied volatility, delta, and liquidity, and understand how they relate to the price of options. We, therefore, recommend new bitcoin investors to avoid derivatives trading until they have gained enough experience before venturing down to the options trading path.

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