A debate that is always open is, what is the best way to operate with cryptocurrencies (especially when it comes to fight volatility and take advantage of its trend) in decentralised environments. Which is better: “Futures” or “Options”? Let’s say that buying/selling options allows us to take a more conservative, less winning, but more controllable position. Futures expose us to just the opposite (and more if we decide to leverage), as we take more risk, but generate more profitability.
It is true that, also favored by the increase in DeFi platforms that offer us this opportunity, the volume of crypto options trading has increased steadily in recent years. Working with options offers certain benefits in terms of management, risk and opportunity. They allow us to work with guarantees in favor of the trend and if the crypto market has something in its DNA, they are very clear and pronounced trends over time, without the liquidation risk. Note that this is not entirely true, but to understand each other, the example is worth it.
The modus operandi is the same as in the traditional or centralised market, the business logic does not vary at all. Option buyers can buy a CALL if they believe the price of the cryptocurrency will go up or a PUT if they believe the price will go down.
For the avoidance of doubt:
The “Buyer of the option” has the right (but not the obligation) to buy or sell the cryptocurrency. On the other hand, the seller of the option is the one who is obliged to buy or sell the cryptocurrency at the agreed price, if the buyer exercises his right. Both buyer and seller can trade both types of option contracts (PUT and CALL), what does apply when buying options, is that buyers pay a premium or consideration for the risk assumed when opening the position. Therefore, the downside is capped, i.e. limited to the premium paid, while the upside depends on the price action of the cryptocurrency.
Important to keep in mind is that we are not talking about a market as liquid as the stock market for example, so select popular cryptocurrencies or cryptocurrencies with good capitalisation and liquidity, i.e. those with high trading activity, to execute option orders without getting trapped in it. Also the fact that options use the Greek variables DELTA (representing how much the price of an option will rise given a $1 increase in the cryptocurrency), GAMMA (representing the rate of change between the delta of an option and the price of the cryptocurrency) and THETA (measuring how quickly an option loses value over time), makes it a little more complicated to understand the outcome of our trades, but this is not an article intended to delve into this topic.
An example of use in the current context. We have ETH at prices of $1,500 / $1,700. There are certain circumstances that directly affect the rise, both ETH and the market in general, such as: expansive monetary policies, use of ETH infrastructure to be the global payment network or that the number of developers on its blockchain does not stop increasing.
With all this, we have the perfect breeding ground to generate a small explosion in the price of ETH, leading it to trade above $2,500, an area where there is a marked resistance. An ideal scenario to buy a CALL option, with a 1 month expiration and a closing price of $2,200. Staying below the price that according to our technical analysis could occur and where most of the funding rate accumulates, you may earn a little less but with the high probability of executing the option, you will ensure the collection of profits. You can sell once you are at the price or, if not, you could also eliminate the risk and sell as the thesis develops.
Finally, I would like to point out that you have several platforms at your disposal that offer the service of working with options, both centralised, such as DERIBIT (https://www.deribit.com/) or DELTA EXCHANGE (https://www.delta.exchange/), and decentralised, such as OPYN (https://www.opyn.co/).
Below you will find some links to further explore and understand this exciting topic:
https://www.investopedia.com/terms/i/inthemoney.asp
https://www.investopedia.com/terms/n/near-the-money.asp