Top 3 Crypto Options Trading Platforms
Crypto options trading is one of the most important tools in traditional financial markets. It is widely utilized for speculation by traders and has grown to become a popular way to take advantage of market movements by hedging some of the risks. By speculating on options, traders are able to maintain a grip on a leveraged position in an asset. Specifically, they are able to sell an asset at a higher price or buy at a lower cost. Investors typically use options as a way to reduce the risk exposure of their portfolio.
In this article, we will cover what options trading is, how it operates, the top three options trading platforms for cryptocurrencies, and finally, some expert advice to keep you from getting burned.
Let’s dive right in…
Understanding the Crypto Options Market
An “option” is a derivative contract that gives its owner the right to buy or sell an asset – in this case a digital asset – at a preset price within a stipulated time frame. Because an option is a derivative contract, it draws its value from an underlying asset or security. Generally speaking, the underlying asset could be a stock, bond, commodity, or digital asset.
Depending on the type of options contract being held, an individual can either buy or sell the underlying asset at the preset price, otherwise known as the strike price. The right to buy is known as a “call” option, while the right to sell is called a “put” option. Furthermore, if an options contract lacks special terms, it is called “vanilla”, while one that is laden with special terms is an exotic option. It is also worth noting that although an options contract gives its holder the right to buy or sell an asset, it is not obligatory. The holder can choose to pull out at any time or decide not to take any action at all.
When compared with “hodling” or spot trading, options trading may appear to be an exotic form of trading digital assets. And they undoubtedly seem more complex to beginner investors. However, with proper understanding, they can become very lucrative derivative instruments.
Here are some of the common terms you will come across when dealing with crypto options trading.
Call & Put: Option contracts typically involve a buyer and a seller. In the case of a call option, the buyer is bullish while the seller is bearish. While the reverse is the case for a put option.
If you believe the price of a cryptocurrency will rise, then you are expected to buy a “call” option. In this arrangement, you have the right to buy, say, BTC at a preset “strike” price, even if the spot price of BTC is higher. On the flip side, if you expect the price of BTC to tumble, you can speculate by purchasing a “put” option. This would allow you to sell the digital asset at a preset strike price even if prices are lower.
Strike Price: This is the price at which an individual holding an option can either buy or sell his underlying asset. An options trader will make a profit if the spot price of the digital asset is higher than the strike price in a call option. Conversely, the trader will also make a profit if the spot price of the digital asset is lower than the strike price in a put option.
To put this in perspective, let’s say you believe that Bitcoin will rise to $50,000 from a current price of $19,000. If you put in a call option at a strike price of say $20,000, you will make $30,000 if Bitcoin does reach your $50,000 target. Alternatively, if the price drops to $10,000 and you’ve already put in a call option, you will lose the amount you paid for the option.
Premium: A premium is the price you get to pay for owning an option. The value of a premium is based on a number of factors including the volatility of the digital asset, the spread between the current price and the strike price, as well as the expiration period.
Trade Date: As the name suggests, the trade date is the date on which the option order (either call or put) is executed on the market.
Maturity: Every options contract has a specific expiration date. The maturity date of an option is the same as its expiration date. It is the last date the holder has to exercise his call or put option. The maturity date is usually fixed and, as earlier stated, the holder is under no obligation to exercise the option.
Top 3 Options Trading Platforms for Crypto
Buying and selling of crypto options are usually done with the use of online brokers or platforms. But unlike the standard cryptocurrency exchanges, the number of platforms offering crypto options trading are far less numerous. The next section explores the top three options trading platforms for cryptocurrencies.
Launched in 2016, Deribit is a Bitcoin Future and Options exchange that has made quite a name for itself. The Netherlands-based derivatives exchange allows traders to trade Bitcoin and Ethereum with up to 100x leverage. It offers European style cash-settled cryptocurrency options. This means that options can only be exercised at maturity and not before. Furthermore, the payment of any ensuing profits that a trader makes at maturity is made in cash, as opposed to digital assets.
As of May 2020, Deribit was ranked as the fourth largest crypto derivatives market by open interest. The exchange regularly achieves a 24-hour trading volume of more than $250 million. The platform has also proven to be quite trustworthy. For instance, Deribit suffered a flash crash on October 31, 2019, due to its own internal error. In response, the exchange rolled back all trades to save its customers from significant losses as a result of invalid liquidations. Meanwhile, a competitor like BitMEX has had similar situations in the past without refunding customers.
Deribit’s interface is relatively easy to use. It is quite straightforward and is separated into futures and options sections. First-time users can buy or sell options contracts with three clicks – select an expiry date, enter the quantity, and select the buy or sell option on the limit order screen. Moreover, KYC is not mandatory on all accounts.
As for fees, Deribit charges 0.04% of the underlying asset value per contract. This is in addition to an extra 0.02% delivery fee when the option is settled.
Security-wise, the exchange keeps around 95% of customer funds in cold storage. This is in line with the industry standard. Deribit also maintains a rather rigid internal security control. So far, the exchange has recorded zero hacks and runs a bug bounty program to incentivize developers to spot vulnerabilities.
- A vast array of option contracts
- Competitive trading fees
- Relaxed KYC requirements
- Zero support for fiat currency
- Lean customer support options
Quedex is arguably the oldest options and derivatives exchange platform on this list. It was founded in 2014. However, to be fair, the platform was not launched until December 2017 and it still suffers a lack of liquidity for some options.
The Gibraltar-based platform is the first company to receive a Distributed Ledger Technology (DLT) license from the Gibraltar Financial Services Commission (GFSC). It offers a plethora of Bitcoin options with a wide range of strike prices. And similar to Deribit, Quedex employs European Vanilla options. This means that settling options are done financially with no asset transfer on the expiration date.
Quedex has a rather sleek interface with the provision for advanced options trading. According to its official website, the exchange allows users to visualize the profit potential from their trading dashboard. They can also analyze option price dynamics using risk metrics.
At the moment, KYC verification on Quedex is being handled by an external company – Coinfirm.io. For this reason, the KYC process on the exchange is more time-consuming in comparison with other competitors.
When it comes to options settlement fees, Quedex maintains one of the lowest in the market. They charge 0.03% for market takers on futures and options. Market makers, on the other hand, enjoy a 0.02% reward.
Finally, on the security of the platform, Quedex has deployed a number of security systems to ensure the safety of users’ funds. Every Bitcoin spend is protected by 3 of 5 multi-signature wallets. Another security feature is the session passphrase which requires users to log back into the platform after a period of inactivity.
- Bankruptcy prevention system
- Robust security features, including PGP-based communications and multi-sig cold storage
- Low liquidity
- Rigid KYC verification system
- No fiat deposits or withdrawals
LedgerX is another popular option trading platform. As of press time, LedgerX was the only US-regulated Bitcoin options exchange. It offers physically settled crypto derivatives. Furthermore, LedgerX is one of the few Bitcoin options exchanges to offer Bitcoin binary options.
Although LedgerX initially focused on institutional investors, the exchange has gotten approval from the US Commodities Futures Trading Commission (CFTC) to offer derivative products to retail clients. The exchange proudly claims the exceptional technical and financial industry experience of its management team::
“The LedgerX management team comprises Goldman Sachs, MIT and CFTC alumni, who bring financial expertise, technical talent and regulatory experience to the firm.”
That aside, LedgerX charges a small fee on each contract sold, as opposed to charging trading fees., However, they charge a flat fee of around $10 for both Bitcoin and USD withdrawals.
Despite its many accolades, LedgerX has a limitation. You need a resident of the US, Singapore, or an NFA-registered individual or entity in order to open an account on the platform.
- The exchange is regulated
- Availability of bitcoin binary options
- Institutional-grade security framework
- Extensive KYC requirements
- Not available outside Singapore and the US
While cryptocurrency options trading has the potential to yield mouth-watering ROIs, it comes with an array of risks. Mainly that, you risk losing a significant portion of your investment if things do not go as planned. On this note, we’ll conclude this post with two very important tips.
- Do not invest more than you can afford to lose: Crypto options trading is more or less a gamble, considering how volatile the space is. One minute the market may be bullish, and the next you may have to catch the edge of a falling knife. For this reason, it is sound investment practice to only put in what you can afford to lose. Besides, options are an economical method of hedging risk against your spot positions. So, they should constitute only a small fraction of your portfolio.
- Stick with reliable crypto options trading platforms: The crypto space in general is still a Wild West. As such, it is important to only deal with credible platforms. Do your research before committing to using an exchange. Some questions that you need to ask yourself may include:
How well do they respond to a customer inquiry? What is their track record? How long have they been operating?