The volatility associated with cryptocurrencies such as Bitcoin (BTC) is hastening the creation of hedging opportunities for traders across the market. Crypto options are rising as the optimal risk management strategy with traders selecting whether to buy or sell these options in aim to hedge their positions.
An option refers to a financial derivative that gives the buyer an opportunity (but not an obligation) to buy or sell an asset at a pre-defined time. There are two main classes of options – calls and puts – the former, allowing the holder an opportunity (not obligation) to buy a specific asset at a pre-defined time and price (strike price) while the latter offers an opportunity to sell.
Options buyers and sellers
In every trade there are at least two parties, the buyers and sellers. The crypto options market also involves buyers and sellers, depending on the strategy taken by the traders. If bullish, traders choose to buy calls and sell puts, while sentiments are bearish traders sell calls and buy puts.
A famous saying in the options market – “options are made to be sold” – resonates with most traders as options tend to favor the option seller. The article explains the advantages of selling options and some risks involved in selling options.
Why some people are willing to sell options?
Buying options gives the trader limited risk potential and unlimited profit possibility. Despite the upside in buying of options, selling options is taking root in the stock and crypto market, and that for one reason – time decay.
As the expiry date of option contracts near, the value of the options eventually become worthless working to the advantage of the option seller. As time decreases, investors would not be willing to purchase an option as the chances to exercise it while being in-the-money (in profit) reduces.
“Time decay, also known as theta, is merely the rate of decline in the value of an option’s premium due to the passage of time. Time decay accelerates as the time to expiration draws near.” – Investopedia explains.
As explained above, buying options is a negative theta trade as the value of the option reduces as time passes. Selling calls and puts is a positive theta trade, in comparison. This means the seller of the option earns more profit from the contract as time decay accelerates.
If the price remains still heading to the expiration date, or worse still moving slowly in the right direction but can’t beat the negative theta, the option buyer will lose money while sellers gain the price of the option (premium).
Why selling options is profitable
After understanding why option selling is profitable, in this section we highlight some of the reasons and occasions that give way to sell options.
- A flat market: If you believe the price of the underlying asset is going to remain flat, or experience very low volatility, you can sell options to earn the premium.
- Positive theta trade: As mentioned, selling options offers a positive theta trade whereby as the contract nears expiration, the chance of gaining the premium paid increases. The implied volatility also decreases and time expires favoring sellers.
- Building trade strategies: Selling options also offers flexible strategy combinations such as selling a covered call option as explained here.
After getting juiced with the advantages that option sellers enjoy, below we focus on the best exchange to buy and sell cryptocurrency options, Huobi exchange.
Selling options on Huobi exchange
Selling options can be an expensive or treacherous route as a trading strategy – especially in crypto, which is very volatile. However, Huobi Futures offers an efficient and cost effective platform to sell and buy options. Users can trade Huobi options whenever and wherever via APP, Web and API. The exchange beats its peers in various factors including:
- Low barrier of entry: The face value of Huobi Bitcoin (BTC) and Ethereum (ETH) options is set at 0.001 BTC and 0.01 ETH respectively;
- USDt-quoted: Huobi options are quoted in Tether’s stablecoin, USDt. This offers the trader convenience as they can trade multiple cryptos using USDt. Additionally, USDt-quoted profit and loss statements makes it easier for traders to account their trades at a glance;
- No restrictions: Unlike most of the top crypto exchanges, Huobi does not have any restrictions on selling options. Most of these crypto derivative exchanges ask for the trader to apply for a special qualification to sell options
- Preferential fee rate: Huobi Futures provides VIP Program and Market Maker Program, with which the maker fee rebate is as high as 0.003 USDT per contract for BTC options.
Selling of options offers users a way out when they think the price volatility will remain low over the short term. Huobi offers users an easy-to-use and restriction free platform to buy and sell options in a bid to boost the trading strategies in the volatile crypto market.