Bitcoin and Ethereum Options Trading at Deribit and FTX
This article is obsolete
Please read the new article about “options trading” I wrote 2 years later
Have you ever tried leverage trading bitcoin, ethereum, or any other altcoins? Are you often right about the market direction but get stopped out or liquidated before the trade goes in your favor?
Did you try to leverage trade like a big boy on Bitmex, Deribit, or ftx.com, but unlike one, you are too much of an amateur to manage your position (add or decrease size). Or do you successfully trade with leverage but would like to hedge? Fear not. Trading options might be something for you!
With trading options, you can long/short bitcoin or ethereum but without getting liquidated! Yes, you won’t get liquidated by the noise in the market. Also, no funding rate. In this article
I’ll show you the basics of options trading. I decided to write this article since many articles about option trading are confusing. For example, they often give some Investopedia definitions of options that don’t make it any simpler. Neither do they explain how actually to make the trade and what to look for?
Betting
Did you ever try making a bet with a friend? “In May 2020, BTC will be above $20k, and we will all have a girlfriend,” for example? Okay, maybe without the girlfriend part. The winner, for example, gets 1 BTC. At some point, your friends pussy out of the bet like that time in the club when your friends said they would approach that girl, but after 10 steps distance, they pussy’s out and say, “Ah fuck it, boys, not in the mood today.” Anyways with options, you can make that bet on an exchange like Deribit or Ftx.com
But here’s the significant part. Let’s say you make this bet when Bitcoin price is at $9k, and somewhere in April, it’s at $15k. You’re in profit because the price is way above $9k, and you can close the trade. You don’t have to wait till may/expiration date.
Options can also be used to buy/sell volatility. (But that goes beyond the scope of this article since this will only cover the basics).
Why aren’t people trading options if this is all so great? It’s not really as marketed by traders as futures, and there’s this misconception that you can’t close your option trade before the expiration date and that the “strike price” has to hit, which is a misconception too.
Calls
In margin/leverage/futures, you can go long. Long (That green buy button) if you expect the price to go up. In options instead of long, you buy a “call.” So when you buy a “call,” you’re betting that the market goes up.
puts
In margin/leverage/futures, you can go short. Short (That red sell button) of you expect the price to go down. In options, instead of going short, you buy a “put.” So when you buy a “put,” you’re betting that the market goes down.
Strike Price
Suppose you’re betting that the market price of bitcoin is going to be higher than $12000 before June 26. So you buy a “call.”
This target price is $12000 is named a “strike price” in the options world.
If you’re betting that the market price of bitcoin is below $7000 or lower before June 26. You buy a “put.”
This target price you have of $7000 is called the “strike price.”
A reminder that the “strike price” doesn’t have to get hit. If you buy “calls” when the BTC price is at $9600, and it hits $11000 before June 26, you are in profit and free to either take profits or continue to wait.
Premium
You may wonder if the price is at $10k, why not buy a call or put at 10000 but notice the bid and ask price. This is the “premium” you pay. The premium is your cost to buy the option. You will be at a loss automatically. Same with futures, you don’t have to market buy. You can use limit orders.
You could bid very low with a limit order but notice the volume with a strike price of 6000. No volume at all. Even if you get a good entry, there needs to be someone on the other side to fill your order.
Implied volatility
When the market is calm, volatility is low. Conversely, when the market is not calm, implied volatility is high.
IV (Implied volatility) is the expected future volatility of the price implied by options prices (premiums).
In the equity market, rising stock prices lead to lower implied volatility, as optimism reduces the equity market’s expectation of risk and hence price variation. When equity markets go down, implied equity market volatility tends to go up.
This is a quote from an article about options written by my most favorite traders: https://twitter.com/ThinkingUSD
Call options might be especially interesting (if you’re bullish) because unlike traditional markets where IV typically rises when the market goes down, Bitcoin’s IV tends to go up when the price of BTC rises. This might generate a double boost to a call option price if BTC goes up.
If you are bullish on Bitcoin short-term, a very simple way to take directional trade on Bitcoin with defined risk would be to buy some short dated call options. These seem quite cheap because of the historically low IV. https://medium.com/@ThinkingUSD/deribit-bitcoin-options-and-volatility-b370ba276761
One place to check implied volatility is on skew: https://www.skew.com/dashboard/bitcoin-options
With options, your risk can be small, but your reward can be significant.
Low probability trades can payout a lot.
The higher the risk, the higher reward. You may lose a few times, but 1 good play can make a lot.
Example
Now let’s say we’re betting that the price of bitcoin will be 12000 or higher before March 27.
In this case, we want to buy a “call” with a “strike price” of 12000 March 27, 2020. Therefore, to buy a quantity of 1 BTC, our buy margin/premium (our cost, which is also our max loss) is 0.0235 BTC.
(If you want to buy a put, you buy BTC-27MAR20–12000-P. Do not press sell on BTC-27MAR20–12000-C because then you’re shorting a call. Which is something else)
Now to calculate our gains and potential loss and all Deribit build an excellent tool for that, which you can find at https://pb.deribit.com/
When the strike price is slightly above 12000, you can see we make $883, and our max loss is the premium of $246 (0.0235 BTC actually when the index price was $9629.67)
If the market price of bitcoin/price of bitcoin on Deribit (let’s call this index price)
If the index price is way above $12000, your profit will be much higher. If the price is above $14000, your profit will be $2270, which is almost 10x on your bet!
(This is a little bit more advanced, consider skipping this if you never heard about hedging and don’t want to confuse yourself.)
Now let’s say you also want to trade futures.
You decide to long 2500 contracts, and for the sake of simplicity, you’re one of those traders who doesn’t add to a position. When the price hits $12000, you make $627, and when the price hits $8000, you lose around $420. (Not calculating the funding rate). With 5x leverage, a price close to $8000 is your liquidation price.
Now let’s say you know you know you can be wrong and want to manage that by buying a put with a strike price of $8000. So you decide to buy a put with a size of 2, which is $274. If the price falls slightly below $8000, you make $900, and your max loss is $274.
Price hitting 12000:
Futures profit-option loss = 627 -274 = $353 profit
Price hitting 8000
option profit-futures loss = 900–420 = $480 profit
Advice
You buy puts or calls. You don’t click “sell” on puts or calls unless you already bought them, and it’s only meant to close your position. When doing that, please check the box “reduce only” and make sure it’s checked. There’s something in options called shorting calls and shorting puts, but that’s beyond the scope of this article/tutorial.
When
In December, when prices ranged between $6.5k and $7.5k, I was waiting for $5.8k, which was stupid since it was very close to the range, and I took the risk of missing out. Back at the time, I didn’t understand options, but what I should have done was buying BTC option calls. The implied volatility was low. Merely waiting for a lower price to hit or maybe was not the best. I should have bought options. That way, I wouldn’t get liquidated, and I was bullish on the overall trend. Back in July, when implied volatility was high, and I felt the price topped out. Ranging below $10k-12k, I should have bought puts. But this is how you can play options when you’re sure about the direction but don’t want to take the risk of getting liquidated by the noise.
Why stack sats if you can stack calls?
Here’s someone who did it right when I lacked the understanding
You could also buy a call, for example, if your technical analysis gives a buy signal. For example, your EMA lines crossed, your StochRSI is low, your MACD weekly is crossing, or your Renko or Heikenashi shows the trend is still strong. Thus, you can buy a “call” and not worry about the noise, flash crashes, or scam candles.
Where to trade options
There are 2 places to trade bitcoin options. The most famous one is Deribit, and the newcomer is ftx.com, or as I like to call it, “Uncle Sam’s casino.” To trade Ethereum options, you can only do that on Deribit for now.
Deribit is the most popular place to trade options. Not only can you trade options on Deribit but also futures. Just like you can on Bitmex. On Deribit, you can trade weekly, monthly, quarterly, and 6 months Options!
If you don’t have an account, use my FTX or Deribit ref link for a 10% discount instead of a 5% discount
Trade options on Deribit: https://www.deribit.com/reg-572.9826
Trade options on FTX: https://ftx.com/#a=1847531
Trade futures & options on Binance and receive a 20% discount instead of 5% from other links: https://accounts.binance.com/en/register?source=futures&ref=way2girlfriends
FTX
Lots of people trade these days on FTX. I like to call FTX “Uncle Sam’s casino.” It’s one of the most exciting exchanges to leverage trade bitcoin & altcoins. Perpetual swaps & futures are possible. Leverage up to 101x. Not to forget the “Bull tokens,” which are altcoins on 3x leverage. FTX began in 2019 but is already leading the derivatives market. Coingecko’s ranking puts FTX as the 6 largest exchange derivatives platform.
Ftx (backed by Binance) recently came with the ability to trade options. The upside to trade on Ftx is that you can also Trade altcoins and bitcoin on the exchange with leverage.
Rather than order books, options on FTX use a Request For Quote system. You can design your option, and once you’ve done that, you can click on “REQUEST QUOTE.” In 10 seconds, you can see a bid or offer for your designed option. You can either accept it immediately or wait until someone makes a better offer. Your request will disappear after 5 minutes. If you’d like to leave a quote out for others to trade, you can set a ‘limit price.’
But I wouldn’t call FTX a casino without a good reason. You can margin trade options on FTX. The best thing to do is to read the documentation on FTX.
FTX also has Bitcoin volatility option contracts. These are called MOVE contracts. (These things are wild. Your PNL can easily be over 100% in a day). It’s excellent they called them MOVE contracts since that is less confusing than the word volatility.
Whether or not you will trade options on FTX, definitely create an account since you can spot or leverage trade bitcoin and other altcoins.
I prefer to trade options at Deribit. Deribit is mostly focused on trading options, and they build creative tools for that. However, I could see people try FTX instead because they can keep their funds on 1 exchange and quickly flip from contracts to trade altcoins instead of sending BTC from Deribit to another exchange. For now, I’d say Deribit is the king for trading options.
KYC?
Ftx and Deribit require KYC in some form.
On Ftx if you provide an email, you can withdraw $1000. If you provide email, name & country of residence, you can withdraw $2000 daily. When providing actual proof, passport, 2 dick pictures, then you can withdraw unlimited daily!
On Deribit, there is level 0 and level 1 KYC. For level 0, you can withdraw up to 1 BTC per 24 hours, and for level 1, it’s unlimited. For level 1, you have to show proof. For level 0, you don’t have to show proof. You don’t have to upload your government ID, so technically, you can lie *wink wink.
Sign up on Deribit and receive 10% discount on fees for trading futures & options: https://www.deribit.com/reg-572.9826
Sign up on FTX and receive 10% discount on fees for trading futures, options, altcoins and altcoins with leverage: https://ftx.com/#a=1847531
Part 2
Take advantage of bitcoin and ethereum volatility at Deribit.
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