July 29, 2021

Trading Bitcoin options is less risky than futures but mind the premium!

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The most basic Bitcoin (BTC) options contracts involve buying a call which gives the holder the opportunity to acquire the asset at a fixed price on a set date. For this privilege, the buyer simply pays an upfront fee, known as a premium, to the contract seller.

Although this is a great way to use leverage while avoiding the liquidation risk that comes from trading futures contracts, it comes at a cost. The options premium will rise during volatile markets, causing the trade to require even further price appreciation to generate a reasonable profit, so the premium is a metric investors must keep a close eye on.

Bitcoin 3-day historical volatility. Source: buybitcoinworldwide.com

Bitcoin’s daily volatility currently stands at 5.4%, which is far higher than S&P 500’s 1.7%. This creates opportunities for arbitrage desks, which will gladly hold Bitcoins in custody and sell a call option to capture this premium.

Let’s look at a hypothetical trade to what role the premium plays in the scenario.

The odds of this trade are calculated according to the Black &Title: Trading Bitcoin options is less risky than futures but mind the premium!
Sourced From: cointelegraph.com/news/trading-bitcoin-options-is-less-risky-than-futures-but-mind-the-premium
Published Date: Sat, 13 Mar 2021 19:14:49 +0000