How to Buy and Sell Bitcoin Options

Bitcoin options are financial derivatives that enable investors to speculate on the price of the digital currency with leverage or hedge their digital asset portfolios. Available on both traditional derivatives exchanges and on crypto trading platforms, Bitcoin options have emerged as a popular investment product among advanced crypto traders. 

For individuals looking to trade Bitcoin options, finding the right trading venue that offers ample liquidity and a high level of security is essential. We’ve compiled the basics every option trader should know, and have structured this guide for trading Bitcoin options to answer the most common questions novice option traders have. 

Understanding Bitcoin Options

Options are financial derivatives contracts that give holders the right but not the obligation to buy or sell a predetermined amount of an asset at a specified price, and at a specific date in the future.

In the case of Bitcoin options, the underlying asset is the cryptocurrency Bitcoin (BTC). While the cryptocurrency options market is still fairly new, you can already trade Bitcoin and Ethereum options on a handful of traditional securities exchanges and crypto trading platforms. 

Cryptocurrency options function in essentially the same way as option contracts on assets like stocks, indexes, or commodities. However, crypto options are generally less liquid than ETF options, index options, or on heavily traded commodities like gold. This is a result of the relatively smaller size of the crypto market when compared to other investment markets. 

The result is that crypto options feature a comparatively bigger gap between the bid and ask price. This generates higher transaction costs in trading crypto options.

European vs. American

There are two main types of options contracts: European and American. The key difference between the two is that European-style options can only be exercised at expiration, while American-style options can be exercised at any time up until the expiry date. 

ITM vs. ATM vs. OTM

An options position can either be in the money, at the money, or out of the money. 

• An in-the-money (ITM) option refers to the situation when the option has intrinsic value. If you exercised an in-the-money option you would profit. For call options, this is when the market price is higher than the strike price. Put options are in-the-money when the market price is below the strike price.
• An out-of-the-money (OTM) option refers to a situation when you would lose money if you exercised the option, meaning the option currently has no intrinsic value. In the case of call options, this is when the market price is lower than the strike price. For put options, this is when the market price is higher than the strike price.
• An at-the-money (ATM) option is currently trading at the strike price. 

Calls vs. Puts

You can either buy a call or a put option. A call gives the holder the right to buy the underlying asset, while a put option gives the holder the right to sell the underlying asset. 

Whether you buy or sell a Bitcoin put option or call option depends on whether you want to speculate on a rising or falling price or whether you are looking to hedge crypto exposure. 

Physical vs. Cash Settle

Options can either be cash settled or physically settled. For example, if you trade cocoa options, you could—if the options contract determines it—receive shipments of cocoa once the options contract expires.

When bitcoin options are settled physically, the bitcoin is transferred between the two parties. When cash settlement is used, the parties would exchange dollars or another currency.

Opening an Options Trading Account

Generally, you'll want an options trading platform that supports the trades you're looking to make, with costs that are affordable for you.

Our picks of the best options trading platforms below allow you to trade options, cryptocurrency, and even crypto futures.

For Bitcoin options specifically, a crypto trading platform is likely preferable. Examples of crypto trading platforms that provide Bitcoin options include:

• Bit.com
• Bybit
• Deribit
• OKX.

Risks to Watch for When Trading Bitcoin Options

Before you begin, know that trading cryptocurrency options involves a high level of risk. If you are new to derivatives trading, you should start with a demo account to learn the ins and outs of options trading before putting investment capital at risk. 

Also, keep in mind that Bitcoin itself is not regulated as a security, but rather is considered a digital currency.

Options Are Riskier Than Spot Trading

Trading Bitcoin options is generally riskier than buying and selling Bitcoin in the spot market.

For example, suppose you buy a call option on Bitcoin with a strike price of $35,000 and an expiry date that is three months away. If the price of Bitcoin doesn’t surpass $35,000 by the expiration date, you will lose the options premium (the price you paid for the option) in full. 

Options Are More Complex Than Spot Trading

When trading Bitcoin options, the price of Bitcoin is not the only factor affecting the value of options contracts. There are several key factors that affect the value of the options you buy or sell, but time decay is by far the most critical. That’s because as the time moves closer to the expiry date, the value of an options contract decreases because the time remaining to trade or exercise the options diminishes.

The Bitcoin Options Market Is Less Established 

While Bitcoin options can be found on traditional securities exchanges, like the Chicago Mercantile Exchange (CME), and on dedicated crypto trading platforms, the BTC options market is still quite young and doesn’t have the deep liquidity found in mature options markets. This can affect price slippage, especially in options with longer maturities. 

How to Trade Bitcoin Options

Trading Bitcoin options is different from trading spot Bitcoin. Not only is the risk profile of your trade completely different, but there is a range of different aspects to consider when looking at which Bitcoin options contracts to buy or sell.

Before you can start trading Bitcoin options, you need to sign up with an exchange that supports crypto derivatives. If your online brokerage account provides you with access to the CME, you could trade Bitcoin options on the leading securities exchange. For most private investors, however, the more likely choice will be to sign up with a digital asset exchange that offers Bitcoin options trading, such as Bit.com, Bybit, Deribit, or OKX.

Here’s how it works. 

Step 1: Sign Up for a Crypto Exchange

Find a digital asset exchange that offers Bitcoin options trading. Ensure you select a reputable exchange; then complete the onboarding process.

Step 2: Deposit Funds in Your Trading Account

Next, deposit U.S. dollars (using one of the exchange’s available fiat funding options) or cryptocurrency in your exchange account. 

Step 3: Practice Trading Options Using a Demo Account

Ideally, the exchange you have signed up for offers a demo trading account where you can start trading Bitcoin options without putting real capital at risk. That way, you can become comfortable with how the options Greeks affect Bitcoin options. 

Step 4: Research the Bitcoin Market 

Learn what drives the price of Bitcoin to get an idea of what type of options trading strategy is best suited for the cryptocurrency and for your risk/return profile. The more you learn about the Bitcoin market and Bitcoin options, the more likely you'll be able to trade options profitably. 

Step 5: Place Your First Bitcoin Options Trade

Once you feel comfortable with Bitcoin options and how they work, you can place your first trade using the platform. 

What You Need to Open an Options Trading Account 

To open an options trading account, you'll need the same documents as for a standard spot trading account.

Personal Information

Crypto options trading platforms generally require the following information from you:

• Full name
• Email address
• Phone number 
• Home address

Additionally, to pass a trading platform’s Know Your Customer (KYC) verification process, you may also need to provide a scanned copy of your government-issued ID (such as a passport or a driver’s license) and proof of address (such as a utility bill or a bank statement). You may also be asked questions about your level of expertise as a trader to enable access to derivatives trading products on the platform.  

Minimum Deposits

Crypto exchanges generally have very low minimum deposits; $10 to $20 is the industry standard, although there are also trading apps that allow you to start buying crypto with as little as $1. 

To trade Bitcoin options, however, you will definitely need more than $1 to get started. Even the cheapest BTC options contracts have premiums worth over $10. 

Trading on Cryptocurrency Exchanges

Trading on cryptocurrency exchanges is a little different. Unlike traditional brokerage firms, cryptocurrency exchanges are not members of the Securities Investor Protection Corp. (SIPC). Therefore, unless user terms specify otherwise, investors with cryptocurrency assets commingled on a custodial cryptocurrency exchange could potentially lose their funds as unsecured creditors.

The three main types of cryptocurrency exchanges are centralized, decentralized, and hybrid.

Centralized Exchanges

Centralized crypto exchanges are online trading platforms that look and feel like traditional online brokerages. You can use them to trade a range of cryptocurrencies in the same way you would buy stocks, bonds, or ETFs using an online broker account after you have registered and completed KYC verification.  

Decentralized Exchanges

Decentralized crypto exchanges are Internet-native online trading venues powered by smart contracts that allow traders to buy and sell cryptocurrencies on a peer-to-peer basis. Crypto assets are traded directly from wallet to wallet. There is no need to create an account or complete a KYC onboarding process, making decentralized crypto exchanges accessible to anyone in the world. 

Hybrid Exchanges

Hybrid crypto exchanges merge a centralized order book for matching trades with decentralized crypto asset custody, allowing crypto traders and investors to benefit from the best features of both types of crypto exchanges. 

Factors to Consider When Opening an Options Trading Account

When choosing where you'll place your trades, keep the following factors in mind:

• Security: Choose a reputable crypto derivatives exchange that has a high level of security, highlighted by a track record of no hacks. 
• Fees: Trading fees can affect your trading profitability, especially when you are an active trader on an exchange with high commissions. Hence, it’s important to choose a crypto derivatives trading platform that balances low fees with platform reliability, strong trading technology, and highly rated customer service. 
• Supported cryptocurrencies: If you are looking to trade a range of crypto options, you will need to choose an exchange that offers more than just BTC options. 
• Research tools: If you plan on trading Bitcoin options, you should use a platform that provides you with all the tools you need to set yourself up for success. Ideally, the trading platform should offer a range of charting tools and options calculators and highlight all aspects of each contract in a clear, easy-to-understand manner. 
• Storage and custody: Choose a trading platform that holds most, if not all, customer funds in cold storage. That greatly reduces the chances of losing funds due to an exchange hack. Moreover, if the exchange has additional wallet security features in place, such as withdrawal address whitelisting, that’s even better. Address whitelisting is a popular exchange wallet security feature that only allows crypto withdrawals to specific “whitelisted” external wallet addresses predetermined by the user. 
• Customer service: Ideally, you should also choose an exchange that has responsive, high-quality customer support. After all, it’s your money at stake, so if there are any issues with the platform, you need to be able to resolve them quickly with the help of the exchange’s support team.  

The Bottom Line

Traders wishing to execute a Bitcoin options trading strategy should choose their trading platform or cryptocurrency exchange with care. There's always risk when trading derivatives, but the relatively new and illiquid nature of the Bitcoin options market means traders should exercise additional caution to protect their investment capital.

The comments, opinions, and analyses expressed on Investopedia are for informational purposes only. Read our warranty and liability disclaimer for more info.