How To Do Options Trading? The Best Beginner Guide

How To Do Options Trading? The Best Beginner Guide

written by John Murphy | January 19, 2023

Options trading has recently become a go-to strategy for cryptocurrency investors. However, it is a complex idea and needs answering as to how to do options trading.

Options trading has been part and parcel of the traditional stock exchange business. Although the crypto market is relatively new, since it has already become a billion-dollar market, crypto exchanges have started offering new trading products, including options.

In simple words, options trading is buying or selling an underlying asset at a pre-negotiated price by a certain future date. Options trading requires an understanding of advanced-level strategies, and the process includes more steps than simply crypto trading.

Through this piece, we will introduce you to all the aspects of crypto options trading, including pros, cons and methodology. So, stick around till the end to learn how to do options trading.

Crypto Options Trading

The mechanics of options trading are the same for stock trading and crypto trading. However, options trading sometimes becomes confusing in a market full of derivatives.

A crypto option is a contract that gives you the right but not the obligation to buy or sell an asset at a certain price by a certain date.

Crypto option trading has two parts.

  • Call Option Contract – The right to buy
  • Put Option Contract – The right to sell

Selling options or buying options are the best strategies to hedge the risk. However, not every crypto option trade is made to mitigate risks, and investors use options to speculate on the future price of an underlying asset. 

Let us now understand two main types of an option contracts.

  • Call Option Contract

A call option is a contract that provides the holder the right to buy a digital asset at a certain date at a specific price.

For instance, the current market price of Bitcoin is $30,000, but your research says it will rise in the next month. So, you buy a call option at a strike price of $35,000 with one-month expiry, and the premium is $400.

Now imagine that Bitcoin’s price has surged to $37,000 – you exercise your call option and would buy Bitcoins at a discounted rate of $35,400 (Bitcoin’s current market price, minus strike price, minus option premium). Thus, you have saved $1600 per Bitcoin through the call option.

On the contrary, if Bitcoin’s price does not exceed the strike price of $35,000, you will only lose the premium amount of $400.

  • Put Option Contract

The put option is a contract that provides the holder the right to sell a digital asset on a specific date at a certain date.

Investors usually buy the put option when they expect the price of an underlying asset to drop in the future. For instance, you anticipate the price of Ethereum to fall to $20,000. Thus, you make a put option contract with a premium of $400 at a strike price of $25,000. 

Now imagine the price of Ethereum falls to $20,000 – you exercise your put option contract and would sell Ethereum for $24,600 and make $4,600 per coin (Ethereum’s current market price, minus strike price, minus premium).

On the contrary, if Ethereum’s price does not fall below $20,000, you will only lose the premium amount of $400.

Option Trading Strategies In Cryptocurrency

Since options trading in cryptocurrency is not a straightforward decision, thus adopting the right strategy at the right is mandatory to succeed in the long term.

So, here are a few tips on when to use either call or put option.

  • Bull Market

If the market is in the bull phase and prices rise, adopt a Call Options strategy. This scenario will allow you to profit if the price moves upwards while limiting your risk to loss of premium only if prices do not increase.

  • Bear Market

If the market is headed down, adopt a Put Option strategy. Since prices are decreasing, a put contract ensures you can sell an asset at a predetermined price.

Let us summarize these strategies.

  • Buy a Call Option and Sell a Put Option – if you think a particular coin’s price will increase.
  • Sell a Call Option and Sell a Put Option – if you believe the price of a specific coin will remain stable.
  • Buy a Put Option and Sell a Call Option – if you think the price of a particular currency will go down.

Frequently Asked Questions

Can beginners use trade options?

The option is an advanced level of trading strategy. Thus it is normally not recommended for beginners. However, this is not a legal obligation so anyone can adopt options trading.

What are the types of options?

There are four main types of options positions.

  • Buying a call option
  • Selling a call option
  • Buying a put option
  • Selling a put option

What is the most successful options strategy?

It depends on the market situation. For instance, if the market is going through a bull phase, then a call option is better, while in the case of a bear market, a put option is better.

Can options trading make me a millionaire?

If options trading strategies are an exercise in the right way, and luck is on your side, you can become a millionaire with options trading. Therefore, the output depends on the application’s right strategy at the right time.

What exchanges can I trade crypto options?

The following crypto exchanges are the best for derivatives and options trading.

  • Binance
  • Deribit
  • Bybit
  • Kraken
  • OkEx

Parting Thoughts

How to do options trading is a query on the minds of many investors. Although options trading has been around for years, the cryptocurrency market has recently adopted this strategy.

Therefore, understanding these plans is vital for new investors to make good returns in the long term. Since options trading is a bit complex concept, thus it is usually adopted by experienced investors.

There are two main types of ETF options trading – call options and put options. Both of these work inversely and are used based on market conditions. 

Usually, call options are a better strategy when stock prices are going up, and inversely when prices are sliding down, a put option is a preferred plan.

We hope you are well-versed in how to do options trading. We wish you all the best with your advanced financial strategies and leave your feedback in the comments if you have already applied for one.