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The world of crypto trading is changing quickly, and many traders are switching to options trading.
However, crypto options trading can be a minefield, especially for less experienced investors.
In this article, we look at the seven best crypto options strategies to help you navigate the volatile crypto trading market in 2024.
What does it mean to trade crypto options?
Crypto option trading involves contracts that give you the right but not the obligation to purchase and sell given CryptoCurrencies at a predetermined price before a specified expiration date is reached.
Options trading can be used for speculative purposes or to protect existing positions. It helps you capitalize on market movements or protect your portfolio from adverse changes in cryptocurrency prices.
Calls
A call is a crypto options strategy that gives you, the holder, the right to purchase the underlying asset at a predetermined (strike) price before the contract expires.
Traders employ the call option when they expect the underlying asset's price to rise. For example, if you buy a call option for Bitcoin with a strike price of $30,000 and it rises to $35,000, you can exercise your right to buy at the price of $30,000.
Puts
Contrary to the call option , a put is a trading strategy that gives the holder the right to sell their assets at a predetermined price until a given expiration date. You can buy a put option when you anticipate a decline in the price of the underlying asset.
For instance, if you hold a put option for Bitcoin with a strike price of $30,000 and the price drops to $25,000, you can sell your asset at $30,000.
How crypto options trading works
To fully understand cryptocurrency options trading, you must first grasp the basics and terms used in options trading. An options trading contract includes the following components:
The underlying asset is the cryptocurrency on which the option is based. Popular choices include Bitcoin, Ethereum, and other leading cryptocurrencies .
The strike price is the price at which the underlying asset can be bought or sold if you exercise the option.
The expiration date is when the option must be exercised or becomes void.
The premium is the price paid for the option contract.
Purchasing an option means acquiring the rights to buy or sell the underlying cryptocurrency at the predetermined price before the contract expires.
If the market movement favors you, the value of the option increases. This allows you to exercise the option of selling your cryptocurrency at a profit. If the market movement does not favor you, your loss is limited to the premium you paid for the option.
The best cryptocurrency options trading strategies in 2024
To successfully navigate the dynamic world of crypto options trading, you need to utilize strategies that maximize profits while capping risks. Here are the seven best cryptocurrency options trading strategies in 2024.
1. Covered call
A covered call is a crypto options trading strategy that involves two parts. It involves holding a long position in an asset and selling a call option on the same cryptocurrency. This option allows you to generate income from your option premium while holding the underlying crypto asset.
This is a popular strategy among traders who are partially aggressive and intend to make additional income.
For example, suppose you have 1 BTC and sell a call option at a predetermined price of $32,000. If the price of Bitcoin remains below $32,000, you get to keep the premium received from selling the call option. If the price rises above $32,000, you get to sell the option at the strike price on top of the premium received from the option sale.
Detailed steps
Buy the cryptocurrency you intend to hold, which is the underlying asset.
Write and sell a call option contract with a strike price above the asset's current market price.
Collect the premium from selling the call option, which provides an instant income.
If your contract expires before the price reaches your strike price, it expires worthless. However, if it hits the strike price, you sell your contract at the predetermined price .
2. Married put
A married put strategy is a crypto options trading strategy that involves purchasing an asset and simultaneously buying a put option for the same amount of the cryptocurrency. This strategy is like an insurance policy that protects you from losses in case the price of your asset drops.
It's an ideal strategy for traders who believe in and want to benefit from crypto's long-term potential but want to stay protected from its short-term volatility.
For example, suppose you purchase 1 ETH for $2,000 and create a put contract with a strike price of $1,800. If the price of Ethereum falls below $1,800, the option allows you to sell it at the strike price, limiting your loss to only $200.
Detailed steps
Purchase the underlying asset.
Buy a put option contract with a predetermined price below the current market price.
Pay the premium, which acts as an insurance policy, protecting you from significant losses in case the price of your underlying asset drops.
If the price of your asset drops below the strike price, exercise the put option and sell your crypto at the strike price. If the price remains above your strike price, the contract expires worthless, and you keep your asset .
3. Protective collar
Protective collar is a crypto options trading strategy where a trader holds a long position in a cryptocurrency, selling a call option and buying a put option. This strategy keeps both profits and losses limited. It's a conservative approach used mostly by risk-averse investors.
For example, suppose you own $100 worth of Litecoin. You sell a call option with a strike price of $120 and buy a put option with a predetermined price of $90. If Litecoin's price increases above $120, you sell your asset at the strike price plus the premium received. If it drops below $90, your put option allows you to sell your Litecoin at the strike price of $90, limiting your loss to $10 .
Detailed steps
Buy the underlying crypto you intend to hold.
Write a call option contract with a strike price above the current market price.
Purchase a put option with a strike price below the current value of your asset.
Use the premium you got from selling your call option contract to offset the cost of buying the put option.
If the price of your asset increases above the call strike price, sell your crypto at the strike price. If the price drops below the put strike price, exercise the option and sell your asset at the put strike price.
4. Long call spread
A long call spread strategy involves a trader betting that an asset's price will increase only slightly. The strategy involves two call options: buying a call option at a lower strike price and selling another at a higher strike price with the same expiration date.
For instance, you purchase a call contract on BTC with a strike price of $30,000 and sell another with a strike price of $35,000. Suppose the price of BTC rises to $34,000. You make your profit from the difference between the two prices after deducting the net premium paid.
Detailed steps
Buy a call option with a lower strike price.
Sell a call option contract at a higher strike price.
Pay the net premium, which is the difference between the amount you spent on buying the low-priced call option and the payment received from selling your high-priced call option.
Suppose the asset price increases to somewhere between the two call option contract strike prices; you make a profit. If the price remains below the lower strike price or increases above the higher one, the difference between the two strike prices determines your profit after deducting the net premium.
5. Long put spread
A long put spread crypto options strategy involves purchasing a put option at a higher strike price and selling another at a lower strike price with the same expiration date. Traders employ this strategy when they expect a slight decline in the price of the underlying asset.
For example, you purchase a put option on BTC with a strike price of $30,000 and sell another with a strike price of $28,800. If the price of your asset drops to $29,000, you profit from the difference between the two strike prices minus the net premium you paid.
Detailed steps
Buy a put option with a higher strike price.
Sell a put option contract with a lower strike price.
Pay the net premium, which is the difference between the premium you paid for the higher strike price and the premium received from the lower strike price contract.
If the price drops to anywhere between the two strike prices, you make a profit. If the price drops below the lower strike price or rises above the higher strike price, your profit is limited to the difference between the two minus the net premium.
6. Bull call spread
A bull call spread is a crypto options trading strategy that involves buying a call option at a lower strike price and selling another call option at a higher strike price. The rule is that the two contracts should have the same expiration date. This strategy limits potential gains but reduces the net premium paid compared to purchasing a one call option contract.
For example, you purchase a call option on Ripple with a strike price of $0.50 and sell a call option of the same asset at a strike price of $0.70. If the price of this asset rises to $0.65, you gain from the difference between the two strike prices after deducting the net premium paid .
Detailed steps
Purchase a call option contract at a lower predetermined price.
Write a call option contract at a higher strike price.
Pay the premium, the difference between the premium for the lower strike contract and the amount received from the higher strike contract.
If the price of your underlying asset rises to anywhere between the lower and higher strike price, you gain. If the price goes below the lower strike price or increases above the higher strike price, your gain is limited to the difference between the two strike prices minus the net premium paid.
7. Long straddle
A long straddle is a crypto options trading strategy that involves purchasing a call and a put option with the same strike price and expiration date. This strategy is perfect for highly volatile assets, as the trader benefits should the market shift in either direction.
For example, you buy a call and a put option on BTC with a strike price of $30,000. If the price of BTC significantly drops or rises, you gain from the increase in value of your call or put contract, depending on the direction of the shift.
Detailed steps
Buy a call option with a strike price equal to the current market price of the underlying crypto.
Buy a put option with the same strike price as the call you just bought.
Pay the premium, which is the total sum of the two options.
If the market price significantly shifts in either direction, you profit from the increase in value of the call or put option. If the underlying asset's price remains close to the strike price, your contracts expire worthless, and your loss is limited to the total premium paid.
The benefits and drawbacks of trading options in cryptocurrency
Crypto options trading can be a lucrative venture. However, you must understand the advantages and disadvantages of these strategies.
Pros
Leverage
Crypto options trading allows you to control larger positions with minimal financial investments. This provides significant leverage and the potential for high profits. This means you can achieve substantial exposure to the underlying asset with a significantly small amount of capital.
Risk management
Options like protective collars and married puts act like insurance policies protecting your investments. They offer ways to hedge against risks. This is particularly useful for traders who trade highly volatile assets where prices can swing at any moment.
Income generation
Selling options such as covered calls allows investors to generate income from their existing assets. This is an attractive strategy for improving returns, especially in a stagnant market.
Cons
Complexity
Crypto options trading is a complex venture that requires a proper understanding of the market and how the options work. These complications can be daunting, especially for beginner traders, and could lead to mistakes if not adequately understood and executed. This could lead to significant losses.
Limited profits
Options strategies designed to cap trading risks are also characterized by limited gains. This means that, although you might mitigate risks significantly, you may lose big if the market makes a huge shift in your favor.
Premium costs
Buying crypto options involves paying premiums. These can add up and reduce your overall gains, especially if the price does not move in your favor. These premiums must be carefully calculated to ensure your rewards outweigh the expenses.
Methodology
Our review of crypto trading options involves thoroughly analyzing the current market trends, reviewing historical performances, and reviewing expert opinions. We evaluate each trading strategy based on its potential for profitability, risk-capping capabilities, and sustainability in different market conditions.
Our goal is to offer traders actionable insights to help them maneuver the dynamic world of crypto options trading.
References
What Is a Long Position? Definition and Examples, Smartasset, 2023
Options Trading: Basics of a Covered Call Strategy, Charles Schwab, 2023
First steps for call options, Fidelity
Underlying Asset, CFI
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