Bitcoin Options, Explained

While options can be used as purely speculative investments, the most successful asset managers use options as a way to effectively mitigate risk and maximize potential earnings.

By combining the four basic options trades with the two basic stock trades, investors can create a range of more sophisticated strategies to optimize their portfolios.

The true power of options is not in their isolation, but when they act as part of a broader strategy.

As mentioned above, one of the most popular options strategies is the Covered Call.

To allow the asset to still generate a return, traders sell a call option on the asset, thereby receiving a return in the form of a premium.

Now, miners can sell a $300 call option with a strike price of $10,000, allowing them to earn yield while still making a profit in the event of a price increase.

Unlike a covered call, which limits the upside of an investment if the call option is exercised and the asset sold, a protective put seeks to limit downside while preserving the upside.

There are collar strategies, straddle strategies, strangle strategies, butterfly strategies and more.

Particularly in these nascent market stages for Bitcoin options, there are also likely to be arbitrage trading opportunities, according to the Put-Call Parity principle.

When this equation does not hold true, there exists an arbitrage opportunity for traders to capture –– especially in the early days of these options markets.