With the growth of financial services surrounding the cryptocurrency world, it was only a matter of time before derivatives trading based off these assets would come about. With the introduction of LedgerX, options and futures trading has come to Bitcoin which can provide holders a chance to profit off their assets without relying on just liquidity swaps and the like.
What is LedgerX
Similar to the options and futures markets for commodities and stocks you might see available from traditional brokers and apps like Robinhood, LedgerX provides for the buying and selling of contracts revolving around Bitcoin (though other cryptocurrency are in the works). These contracts could be considered as either speculation plays or insurance, depending on both the buyer's and seller's strategy and position. For the purposes of this post we'll be focusing on options and its two types; Calls and Puts.
Calls and Puts
In an option contract there are two sides; A person (or other entity) that is willing to sell an asset call the Short position and one who is willing to buy called the Long position. In both call and put option contracts there is a short and long position, a target price the contract is based on called the Strike, an agreed upon cost for the contract called the Premium, as well as a specific end date for the contract called the Expiration date which follows a regular schedule. The difference between a call and a put is which party gains control of the contract and which party receives the premium.
In a Call, the short position is the party offering a contract to sell their offered asset (in this case a certain amount of BTC) at a set strike price and expiration date to anyone who wishes to take a long position on the contract in exchange for a certain amount of premium. Anyone who bought the contract would then have the option on the expiration day of the contract to purchase the asset at the strike price listed in the contract no matter what Bitcoin's current asking price was.
Note that the owner of the contract may purchase the asset instead of must (hence why its called an "option"). If Bitcoin is trading less than the strike price of the contract it would make no sense to execute the contract to buy it at a higher price. In this situation the contract would expire worthless and the seller of the call would pocket the premium they received at the contract's sale as pure profit. However if Bitcoin is trading above the strike price by a significant margin the owner of the contract could execute the contract, forcing the short position to sell their asset at the strike price. Depending on amount of premium they first received the short position may still come out ahead vs if they had just sold their coin normally, but usually in this situation the contract seller will experience a 'loss' due to selling their Bitcoin for under market value.
Puts work the same way, save for the short position is the one purchasing the contract this time and the long position is putting up an amount of cash equal to strike price times the amount of Bitcoin listed in the contract as collateral. In this instance, if the price of Bitcoin were to drop below the strike price then the short position may execute the contract and sell their Bitcoin for more than the going rate. This could be used to lock in previous gains when there are concerns of an upcoming drop or for a speculator to 'short' the market, buying up cheaper BTC right before expiration and then immediately selling it at a higher price. The long option can also make out in this situation as they can sell put contracts for a strike price they'd be comfortable buying BTC at anyway but in this case are able to earn some cash back as premium while they wait for the price to drop. The downside here of course is that Bitcoin could crash before the contract expires, leaving the long position stuck overpaying for a heavily depreciated asset.
Note that the value of calls and puts will change based on the volatility of the price of BTC, with the value going up the closer the contract will be worth something at expiration (In the money) and going down the greater the chance the contract will be worthless at expiration (out of the money). In fact there are strategies built around playing these movements without ever actually planning on executing a contract, though that will be a discussion for another time. Just keep in mind their are ways to exit a contract without having to wait till expiration, though whether this will result in a profit or loss depends on a number of factors.
How can we take advantage of Bitcoin's volatility?
Options trading, whether with stocks or crypto, presents risks that should not be overlooked. However, it can also provide opportunities to earn significant income on volatile assets that might otherwise be sitting idle. In my next post I'll be going over a strategy I use in my own options trading account that helps to minimize risk while providing significant upside. If you have an questions or would like more information let me know down in the comments. There are also numerous resources online on how options trading works and I encourage you to research at your own pace before jumping into trading.
Thank you and I'll see you soon!
