Why we love trading cryptocurrency options – top 4 reasons

It’s no secret that we at Rogue Trader Academy love trading cryptocurrency options, both BTC and ETH options.  The fact is, these cryptocurrencies and their tradable options represent a unique opportunity at this stage of their lifespan.

Crypto itself has become quite the phenomenon, complete with incredible volatility, uncertainty, and head-spinning price swings at times. It has made and lost fortunes for many people during its very short time in existence.

Cryptocurrencies are in their infancy and have all the growing pains (volatility) that one may expect with not only a new asset class but one that also represents a potentially seismic shift, potentially affecting numerous sectors of the economy and forever changing the way business is conducted.

Will cryptocurrencies be around in their current form in 5 to 10 years? I don’t know.  I strongly suspect that that landscape will have significantly changed over that period of time though.  What it will ultimately look like is anyone’s guess.

While this article won’t cover the overall benefits and applications of options in the financial world, let’s explore the main cryptocurrency-centric points that we think make them a no-brainer for adding to your trading repertoire.

Reducing risk and uncertainty in the crypto market

Trading cryptocurrency options allows us to reduce risk and uncertainty because we don’t need to have direct exposure to any cryptocurrency because options are derivatives.

This is especially relevant and speaks to those traders and investors that were fearful of jumping into crypto directly.  If the FUD (fear, uncertainty and doubt) are too strong, one can always buy an option for a fraction of the cost of buying the crypto asset outright, but still participate in the price action.

First things first, eliminating uncertainty isn’t such a big factor for us specifically and other professional traders, as we’re quite comfortable using tools to minimize or hedge risk with any asset. For us, it’s simply another thing to trade and we’ll manage the risk as we would for any asset.  

However, for the retail / investing public at large with a generally more myopic and predictable pattern and focus, it has definitely been a pain point.  

Who can blame them really…crypto is a new asset class, not widely understood, is prone to outrageous price swings, lack of regulation, and is the subject of relentless love/hate hit pieces in the media, etc.  Crypto has basically been kryptonite to a large swath of traditional financiers, traders and investors.

Broadly speaking we love fear and uncertainty, and historically this has been a massive income generator for us because of volatility.

Fear brings higher volatility, which drives option prices, and primary components of our trading strategies specifically revolve around selling volatility.  

However, a massive amount of retail traders simply don’t know (or understand) that there’s an alternative way of trading and speculating on the crypto market that allows them to comparatively have almost no skin in the game. That is of course, through the use of options.

One of the enduring myths about options is that they’re high-risk. However, with even a cursory look at the mechanics of options,  it’s evident that while they can be highly risky, they can also be used to reduce or eliminate risk as well as initiate limited-risk, revenue-generating trading strategies.

It simply comes down to a matter of how options are used.

For a simplistic example of taking a directional trade by either buying a call or a put (betting the price will increase or decrease, respectively), the total amount of risk is the price (premium) that was paid to purchase the option.  

No matter what the price of the underlying asset does during the life of the option, the option buyer will never lose more than what they paid (we’ll cover capital outlay and cost efficiency in the proceeding point below).

So, because options can be used in such a manner as to limit the potential loss, they go a long way in coaxing reluctant investors into the cryptocurrency space, relieving concerns of risk and uncertainty as they begin trading cryptocurrency options.

Capital outlay and cost efficiency

Capital outlay and cost efficiency directly relate to the first point concerning the reduction of risk and uncertainty because we can all agree that having to invest less money while potentially getting sizeable returns reduces hesitancy and makes the plunge into trading cryptocurrency options a lot more palatable.

Options have built-in leverage that allows investors the potential for large profits from small investments. 

This can be demonstrated by comparing the purchase of an underlying asset vs. the purchase of an option.

For simplicity, let’s use the more commonly known and understood example of purchasing a stock (the mechanics of options work the same regardless of whether the underlying asset is a stock, cryptocurrency, commodities, etc.).

If an investor had $1000 to invest and wanted to buy $1000 worth of an asset and that stock was currently trading at $20… that person could spend the entire $1000 and purchase 50 shares (1000 / 20= 50 shares)  If the stock price rose to $25, the investor could sell the shares for $25, making a $5 per share profit, or 25%. 

If this same investor chose instead to buy call options (call options are bought if one expects the price to rise, put options are bought if one expects the price to fall)  trading at a price of $2 (multiply by 100 to reflect each options contract) with a $20 strike price with that same $1000, he could buy 5 call options in total, representing control of 500 shares (each option contract represents 100 shares of stock).

If the underlying stock price rose to $25 near the expiration of the option, the investor could either sell the options for $5 profit each or in the case of stock options, exercise the right to purchase the shares at $20 (strike price), then immediately sell them in the open market for $25, returning $2500.

The difference in ROI is significantly more with the options trade. When we subtract the original investment of $1000, the options trade profited $1500, or 150%.

When looking at risk, let’s consider another example using BTC this time.

If an investor wants to buy 1 BTC, and the price of BTC is $25,000, the total risk of this is $25,000, because it, (or any asset) could theoretically fall to zero.

Buying a call option with a strike price of $25,000 might cost the investor $1,000, and would “control” 1 BTC for the life of the option.  So aside from the obvious leverage that we discussed above, the total risk to the investor, in this case, is $1,000. Regardless of what happens to the price of BTC (i.e. it went down), the most the investor could lose is $1,000.

For pennies on the dollar and with limited risk, one is able to participate in pure speculation (what most crypto traders attempt) of either up or down movements in an underlying asset.

Volatility and trading cryptocurrency options

Volatility is, of course, a double-edged sword and it measures the risk of an asset.

It is the degree of variation of an asset's price over time. The more volatile an asset is the higher the risk.

At Rogue Trader Academy, when volatility is rising, we aim to buy it.  When it’s falling we aim sell it.  Buy low, sell high and sell high, buy low.

Most people equate volatility with price, as they are correlated.

So when we look at buying volatility, we’re placing directional trades such as buying calls or puts (although we’d rarely buy or sell them “naked”). We can equate this volatility to the price of an option.  

When volatility increases, the price (options premium) increases…hence buy low, sell high.  

Alternatively, if volatility has been very high or starts to decline, we can sell it (high premiums), and if volatility declines, buy it back at a lower price… sell high, buy low.

Options provide strategic alternatives

A broad spectrum of alternatives and uses, from pure speculation to hedging to non-directional, income-generating strategies, options can do it all.

Once they’re understood, one of the most appealing things about options is that they can generate returns regardless of market direction. Up, down, sideways… it doesn’t matter,  there’s always an opportunity with just a few basic options strategies in one’s personal trading toolbox.

Combining options in various ways or in conjunction with an underlying asset can produce pretty much any desired risk/reward profile.

In fact, they’re often referred to as the Lego of the financial world. 

In summary, we love trading (and teaching) options and have made a career out of it for over two decades. 

Trading cryptocurrency options trading in particular, and due to the volatile nature of cryptocurrencies at this stage of their life cycle, present a wide array of continuous opportunities to speculate or generate consistent returns in a limited risk and high probability environment.

• Eliminating uncertainty
• Capital outlay and cost efficiency
• Reduced risk
• Volatility
• Strategic alternatives

The first reason why we love trading crypto currency options is coloured by broad brush strokes, and addresses those traders and investors that were fearful of jumping into the crypto end of the pool. 

First things first, eliminating uncertainty isn’t such a big factor for us specifically, as we’re quite comfortable navigating and minimizing risk with most assets including crypto, but for the retail / investing public at large with a generally more myopic and predictable patterns and focus, it has definitely been a pain point.

Broadly speaking we love fear, and historically have been a massive income generator for us. 

Fear brings higher volatility, and primary components of our trading strategies specifically revolve around selling volatility.  

What I’m talking about here is the fear of holding the underlying asset and the uncertainty of the volatility and future of the asset itself. There’s plenty of folks out there who completely missed out on the initial (and spectacular) run up of cryptocurrencies in general, too timid to commit to something that was so polarized and new. Fair enough and very understandable, we all have our different levels of comfort when it comes to risk.

Going “all in”, or heavily into any asset (and certainly crypto) is usually a pretty bad idea.  The reasonable approach would be to allocate a small or specific amount to crypto to limit exposure, and then sleep well at night.

However, a massive amount of retail traders simply don’t know (or understand) that there’s an alternative way of trading and speculating on the crypto market that allows them to have almost no skin in the game comparatively. That is of course, through the use of options.

One of the enduring myths of options is that they’re high risk. However, with even a cursory look at the mechanics of options,  it’s obvious that while they can be highly risky, they can also be used to eliminate risk entirely as well as initiating limited risk trading strategies.

It simply comes down to a matter of how they’re used.

For a simplistic example of taking a directional trade by either buying a call or a put (betting the price will increase or decrease, respectively), the total amount of risk is the price (premium) that was paid to purchase the option.  No matter what the price of the underlying asset does during the life of the option, the option buyer will never lose more than what they paid (we’ll cover capital outlay and cost efficiency in the proceeding point below).

So, because options can be used in such a manner as to limit the potential loss, they go a long way coaxing reluctant investors into the cryptocurrency space.

Capital outlay and cost efficiency directly relates to the first point concerning the reduction of risk and uncertainty because I think we can all agree that having to invest less money while potentially getting sizable returns reduces hesitancy and makes the plunge into crypto trading a lot more palatable.

Options have built in leverage that allows investors the potential for large profits from small investments. 

This can be demonstrated by comparing the purchase of an underlying asset vs. the purchase of an option.

For simplicity, let’s use the more commonly known and understood example of purchasing a stock (the mechanics of options work the same regardless of whether the underlying asset is a stock, cryptocurrency, commodities, etc).

If an investor had $1000 to invest, and wanted to buy $1000 worth of an asset and that stock was currently trading at $20… that person could spend the entire $1000 and purchase 50 shares (1000 / 20= 50 shares)  If the stock price rose to $25, the investor could sell the shares for $25, making a $5 per share profit, or 25%. 

If this same investor chose instead to buy call options (call options are bought if one expects the price to rise, put options are bought if one expects the price to fall)  trading at a price of $2 (multiply by 100 to reflect each options contract) with a $20 strike price with that same $1000, he could buy 5 call options in total, representing control of 500 shares (each option contract represents 100 shares of stock).

If the underlying stock price rose to $25 near expiration of the option, the investor could either sell the options for $5 profit each, or in the case of stock options, exercise the right to purchase the shares at $20 (strike price), then immediately sell them in the open market for $25, returning $2500.

The difference in ROI is significantly more with the options trade. When we subtract the original investment of $1000, the options trade profited $1500, or 150%.

When looking at risk, let’s consider another example using BTC this time.

If an investor wanted to buy (and could afford to purchase) 1 BTC, and the price of BTC was $25,000, the total risk of this is $25,000, because it, (or any asset) could theoretically fall to zero.

Buying a call option with a strike price of $25,000 might cost the investor $1,000, and it would “control” 1 BTC for the life of the option.  So aside from the obvious leverage that we discussed above, the total risk to the investor in this case is $1,000. Regardless of what happens to the price of BTC (ie it went down), the most the investor could lose is $1,000.

For pennies on the dollar and with limited risk, one is able to participate in pure speculation (what most crypto traders attempt) of either up or down movements in an underlying asset.

Volatility is of course, a double edged sword and it measures the risk of an asset.

It is the degree of variation of an assets price over time. The more volatile an asset is, the more the risk.

At Rogue Trader Academy, when volatility is rising, we buy it.  When it’s falling we sell it.  Buy low, sell high and sell high, buy low.

Most people equate volatility with price, as they are correlated.

So when we look at buying volatility, we’re placing directional trades such as buying calls or puts (although we’d rarely buy or sell them “naked”). We can equate this volatility to the price of an option.  

When volatility increases, the price (options premium) increases…hence buy low, sell high.  

Alternatively, if volatility has been very high or starts to decline, we can sell it (high premiums), and if volatility declines, buy it back at a lower price… sell high, buy low.

A wide spectrum of alternatives and uses, from pure speculation, to hedging, to non directional, income generating strategies, options can do it all.

Once they’re understood, one of the most appealing things about options is that they can generate returns regardless of market direction. Up, down, sideways… it doesn’t matter,  there’s always an opportunity with just a few basic options strategies in one’s personal trading toolbox.

Combining options in various ways or in conjunction with an underlying asset can produce pretty much any desired risk / reward profile.

In fact, they’re often referred to as the lego of the financial world. 

In summary, we love trading (and teaching) options, and have made a career out of it for over two decades. 

For crypto currency option trading in particular, and due to the volatile nature of crypto currencies at this stage of their life cycle, there’s continuous opportunities to use options to speculate and otherwise generate returns in a limited risk and high probability environment.