Trading Cryptocurrency Options

Trading Cryptocurrency Options

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What two instruments can you combine into one of the most effective trading strategies of all time? These are financial options and cryptocurrencies. Indeed, as options are volatility enhancing products, using them for something as volatile as cryptocurrency is wise.

Cryptocurrencies are the new vogue in today’s day and age. They have taken the world by storm as more people are seeing the benefits of a decentralized currency that is not controlled by the state. They are also one of the most volatile with daily swings that can approach up to 10% or more.

In this post, we will run through some of the most effective ways in which you can combine option trading with cryptocurrencies in an effective combination that yields positive long term results.

What is an Option

Before you can trade with an option, you have to know what it is exactly. An option is a derivative instrument. What this essentially means is that it derives its value from some underlying asset (in this case cryptocurrency).

An option is a special type of derivative where the holder has the right but not the obligation to buy / sell the asset at some predetermined time in the future. In other words, this is an asymmetric instrument with different payouts based on where the asset is at.

There are some key metrics that you have to understand for the option. Those are the strike rate, the expiry time and whether the option is a CALL or a PUT. The strike rate is the price at which the asset can be bought or sold in the future. The expiry time is when in the future that can be bought or sold and whether it is a CALL or PUT is whether you will be buying or selling the asset.

What is a cryptocurrency

Cryptocurrency such as Bitcoin, Ethereum or Dash are essentially digital currencies that exist on a decentralized ledger (blockchain) where transactions are stored. These are not controlled by any government and are run by the mathematics of the protocol.

Volatility in Cryptocurrency Markets

That protocol is based on complicated mathematical algorithms in the field of cryptography (hence cryptocurrency). These are 100% secure and fully transparent. There is no way that it can be faked and there is full trust in the system.

This cryptocurrency exists in the Ether and can be sent with very little cost all across the world without the interference of any bank. It will move in a peer to peer fashion across the numerous nodes.

However, the reason that they are so volatile is because they are seen as a store of value. They are naturally deflationary as no central bank has control over the cryptocurrency. This is a very alluring prospect for many people as they don’t always trust the monetary authorities.

How to Trade Options on Crypto

Before you can trade options on cryptocurrency, you need to set yourself up with a broker who is well regulated and has a wide range of different assets for you to trade. There are any number of crypto option brokers for you to choose from and they are well reviewed online.

It is also advisable, given that you are just starting out, that you do a trial or demo account before you actually fund money. This will allow you to get a better sense of how to trade the markets and also whether it is something that you are really good at.

Once you have an account set up at the broker (either demo or live) you need to be able to trade these options with a well known strategy. There are a range of them that you can use. Some of these are well known in the equity markets whereas others are more specific to options.

Crypto Options Trading Strategies

When it comes to cryptocurrency trading with options, you can use a number of established strategies that have been used to great affect in the Forex markets. These include strategies including technical analysis which follow trends. You can study price trends and particular points on the chart.

However, when it comes to the fundamental factors which will impact on cryptocurrency markets, these are related to two main groups of them. One is particular announcements from the company that will impact on the price. These announcements usually bring a lot of speculation and hence big movements in the price of the asset.

For example, there was the recent moves in the price of the Ripple payment cryptocurrency prior to a conference in Toronto where the owner was meeting with a number of industry heads. There was speculation in the community that there could be a big announcement.

Ripple Volatility over week

Another group of fundamental factors are those that are technically related to the cryptocurrency in question. These include things like the total supply that is coming from the miners on the network or any technical changes to the code that will impact the fundamentals on the market.

A good example of this currently it the debate around the scaling of Bitcoin at the moment. There are suspicions that this could lead to a split in the chain called a “Hardfork”. This will create two different cryptocurrencies. Indeed, Bitcoin has split already a number of times this year and there has been large market moves over the past week.

This can lead to a lot of volatility in the price of the asset prior to the split as people make their bets on what the price of the resulting coins will be. This can lead to a great deal of volatility in the price prior to the fork.

For all of these big market moves in the price of cryptocurrencies, using options will allow you to profit from relative moves in the underlying asset in an asymmetric fashion with a range of option strategies.

Keep Steady

When it comes to trading cryptocurrencies, there is a great deal of volatility as well as risks. You have to keep a constant eye on your positions as well as monitor the movements closely. Similarly, lower levels of liquidity in the market mean that prices can move that much more rapidly.

You should keep an eye on all of the latest developments that are coming out of the market such as announcements and updates on the technology from the development team. Sites like cryptopanic are your number one resource to all of these.

Lastly, you should keep at it. Cryptocurrencies are really risky and one day you could make extensive gains as they rally and on the next you could lose a lot. You have to not let the volatility and emotions get to you. Keep an analytical mindset going and you should be able to succeed.

4 Replies to “Trading Cryptocurrency Options”

  1. What about trading cryptocurrencies with CFDs and spread betting. Would you suggest something similar? Or would this be too risky with something like a cryptocurrency?

  2. Hi Shaun. I really enjoy reading your posts. I wanted to know what sort of option strategies in particular that you would use for something like this? Should I take a look at more traditional ones like flies or should I look at scalping?

    1. Hi Tim. I would consider that you implement option type strategies around important events in the cryptocurrency arena. For instance, you could have an option fly that is setup around the price and expiry that is happening at that time. For now I would say that is the latest hardfork that is occurring on about the 15h November.

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