This week, CoinMarketCap dives deep into options in crypto and explains ways to trade them on Bybit.
Disclaimer: No content of this article aims to offer any type of financial advice in any way. Readers are encouraged to exercise their own discretion and do their own research before trading any financial instruments.
Diversity is the key to success and don’t put all your eggs in one basket — two of the most excessively used phrases in financial markets. But what options are available to fill your basket other than spot and futures in crypto? Let us help you out!
As the crypto industry is growing, many are trying new trading products to find the most profitable engine. Financial derivatives are one way to gain exposure to different assets and/or speculate on their price.
An options contract gives investors the ability to buy and/or sell an underlying asset. Since it's an options contract, the investor is not under any obligation to exercise the buy or sell order: rather they have the “option” to do either. This freedom from obligation makes options a favoured financial instrument for investors who want to speculate on the price of an asset without buying the asset itself. As a result, options contracts are utilized as a way to hedge against the risks of buying the asset.
If an investor is feeling bullish on an asset, they might purchase call options (which lets them buy the asset) or if they are feeling bearish, they might purchase put options (which lets them sell the asset).
In this article, we will explain what options are to the newbies. We will also go through the ways of trading options on Bybit. Let’s dive in to the definition of options first!
What Are Options?
When you buy an options contract, you are effectively buying the right to “buy” or “sell” the underlying assets (such as a commodity or security):
1. at the specified time, and
2. for a specified price.
But — to reemphasize — that this is not an obligation. You could choose to not buy or sell that contract, but this will then render the options contract obsolete.
To buy the contract, you pay what is known as a premium. This premium is what grants you the right to buy or sell the contract.
Let’s understand this better with an example. Let’s assume that you are speculating on the price of fuel (petrol, let’s say) within three months. Due to the prevailing problems with logistics, you know that the price is going to go up — and you believe it will go up 25%. If the price per litre today is roughly $5, then you are expecting it to go up to $6.25. In that case, you can buy call options at $5 and set the right to “exercise” the buy option after three months. And after that period if the price does go up to, say, $6 then you can exercise the right to buy for $5 and sell for $1 worth of profit.
This is roughly what options trading looks like. Note that this is in stark contrast to futures trading. Why? Because a futures contract obligates you to buy the asset at a fixed price. Options, however, doesn’t.
Options can be of various types. The most common ones are usually listed on exchanges and can be traded by investors like you and me. However, some banks also provide special over-the-counter (OTC) options that are tailored for specific situations. These are usually underwritten by investment banks and are only available to accredited investors.
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Understanding Options Premium
Now that you understand what options are, let’s discuss its boring-but-important element called “options premium.”
When you buy any options contract, you have to pay what is known as the options premium. There are two factors that help determine the option premium: one is the intrinsic value of the option and the second is its time value.
The intrinsic value of an option is the money that you make if you exercise your call/put immediately. And if you do, then the difference between the price at which you exercise the option (known as the exercise price) and the current value of the underlying asset is the intrinsic value.
Let’s understand this through an example. Suppose you have call options for an asset for $20. Since the current market price of that asset is $50, you can exercise the call option right away and stand to make $30 per share. On the contrary, if the exercise price of your call option was $50 and the price of the underlying asset fell down to $30, then you will not stand to gain anything.
However, if you know that the price of the asset will recover a year after the fall, you might be willing to bet $5 more for a 1-year contract. In this case, the options premium would go up to $25.
Now that we understand the basics of options, let’s check how options are traded in the crypto market!
Trading Options in Crypto
Trading options in crypto is often considered a relatively cheaper way to speculate on assets when compared to buying futures contracts.
In crypto, you can trade two different types of options:
American style: These options can be exercised any time before the contract’s expiry date.
European style: These options can be exercised only on the expiry date of the contract.
These options contracts are usually created (or “written”) by a seller. They have the strike price (or the price at which the contract will be exercised , whether it's a put option or a call option) and expiry. They are then listed on an exchange.
One of the biggest differences between crypto and the traditional stock market is that the crypto market is open 24/7.
Now that we have understood the very fundamentals of what options are and how they work, it’s time to really get our hands dirty and see how trading them work. Let’s check out how you can trade options on Bybit!
Trading Options on Bybit
Bybit offers different types of options contracts. A key feature to remember for Bybit options is that they offer European options contracts, which means you can only exercise your options contracts on the day/date that they expire. Another thing to note for Bybit is that the options contracts they offer are cash-settled — which means you don’t ever physically receive the underlying asset.
Physical delivery of the asset here implies the actual transferring of the asset to your trading account.
Let’s discuss the steps to trade options.
Step 1: Access the Options Trading Page on Bybit
To access the options contracts, go to to the “Derivatives” tab at the top and select “USDC Options.”
You will be redirected to this page where you will see calls on the left-hand side and puts on the right-hand side along with their strike price.
To best explain how calls and puts work, we’ll walk through how to buy both.
Step 2: Transfer Money to Bybit
If you haven’t already, you need to transfer some money to your Bybit account. With options trading, especially if you are doing it with a small amount of money, KYC might not be required. Be sure to check out your location's KYC regulations before trading.
You can use any wallet to transfer money to your Bybit account. Simply find the deposit wallet address on Bybit and you will be able to make the transfer.
Step 3: Add Money to Your Derivatives Account on Bybit.
The next step is to add funds to your derivatives account. To do that, head over to “Assets” in the top-right corner of the screen. And then, click on “Transfer”.
You will be given the option to transfer money from your “Spot” account to the “USDC Derivatives” account. Select the asset that you want to transfer along with the amount, and the assets will be transferred.
Once you have made the transfer, you will be able to see the money reflect on the “USDC Options” page.
Step 4: Buying a Call
Now, let’s buy a call. If you scroll across the trading page, you will notice that you can buy contracts that expire on certain dates along with other info like strike price. For the sake of this article, we will buy a call for July 22, 2022. Let’s choose a strike price of 20,000. Hence, we will select this call.
When you select that call, you will see the trading screen open up on the right. There is a lot of info on this screen — most of which is beyond the scope of this article. Thus, we will look at a few important things.
1. The thing that you see at the top that says, “BTC-22JUL22-20000-C” is the contract itself. It represents that the underlying asset for that contract is Bitcoin, which expires on July 22, 2022, and the strike price for that is 20,000. The “C” here represents a call.
2. This is a tab that shows different types of technical data. For us, what matters is the underlying price and the implied volatility. The underlying price is the market price of the asset, and the implied volatility is how volatile the market currently is.
3. This is where the actual buying of the contract happens. Now, the “Price” here is the premium of the contract that you are willing to pay.
As you can see, the person offering the contract has valued the premium at 1,020 USD.
Now, you can decide to decrease that premium as well.
Let’s say that I am willing to pay USD 100 premium for the contract and the quantity of BTC that I want to buy (or the quantity of BTC that I want the right to buy) is 0.1. In a nutshell, I’ll be paying $100 to get the right to buy 0.1 BTC at USD 20,000 on July 22, 2022.
Let’s go ahead and place this order. Once done, you will see it in your “Active Orders” above.
Buying a Put Option
Buying a put is quite similar to buying a call. Everything else will be the same apart from the strike price.
Let’s assume that on July 22, 2022, the price of BTC will fall down to 18,000. Now, if we were to buy a put for 20,000, we will make a profit of USD 2,000 (minus the premium) because we will be able to buy the asset at a lower price and sell it for the strike price of 20,000. Let’s look for a put with 20,000 strike price.
The process for buying the put will also be exactly the same. We will decide the premium that we want to pay for the contract and the quantity of BTC that we’d like to buy. We’re paying a premium of $100 for 0.1 BTC.
If you place an order, you will see it get reflected in your “Active Orders”.
Remember that if the put becomes unprofitable, you will only be losing your premium (because you are not using margin here).
Step 5: Cancelling Your Calls/Puts Before Expiry
Remember that Bybit offers European-style options only. This means that you can only exercise these contracts on the expiry date. If, however, you want to close your call/put position earlier, go to the “Active Order” section and select the “Cancel” option. This will cancel your contracts.
Remember to fulfull KYC requirements if you want to withdraw a large amount of money from any trading platform.
Closing Thoughts
Options trading is an interesting hedge for speculating on the prices of assets. One of the biggest benefits of trading options over other derivatives, like futures, is that you don’t have the obligation to buy the asset at the strike price. You merely have the “option” to do it, often making options more attractive to beginner-level traders who want to stay safe from extreme volatility.
While the losses are not as amplified (unless you are using leverage) and you are only set to lose premium in most cases, options trading can be risky for those who are not too familiar with crypto market’s volatility. As always, all readers are encouraged to do their own research before they start trading any financial instruments.
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