How to trade bitcoin with leverage and not worry about liquidation?

Institutional traders have long known the benefits of derivative trading, including leverage and hedging. One can predetermine maximum profits and losses by trading market options, even with volatile assets like Bitcoin.


Such tools allow traders to make a profit independently of what happens in the coming weeks or even months, even if it is much more complicated than before. This is essential for peace of mind traders to achieve optimal performance.

Retail traders have only recently started using derivatives, although they mostly focus on futures offered by BitMEX, OKEx, Binance and many others. The main problem here is the liquidation risk, as cryptocurrencies are very volatile.

Buy a call option? Here are the costs and benefits

Buyers of the option can get Bitcoin at a fixed price on a predetermined date. For that privilege, the buyer pays a prepaid premium to the seller of the option. The contract has a maturity date and the price made so everyone knows in advance the potential profits and losses.

If Bitcoin rises in the following hours or days, the price paid for this option will increase. The buyer can sell this option contract and close his position with profit or wait until the contract expires.

On the date the contract is specified and the maturity date, the buyer of this option will be able to get Bitcoin at the agreed price previously. Remember, buyers have paid for this right in advance. If the Bitcoin price is currently lower than the contract price, the buyer may abandon it. That's why it's called an option in the first place.

Each exchange sets its minimum trading size, although 0.1 Bitcoin contracts tend to be the lowest.

Benefits of Bitcoin options over futures

The main benefit for options buyers is that they know upfront maximum losses and also don't have to worry about closing their positions first.

Imagine a scenario in which an investor has $ 500 and expects the Bitcoin price to increase significantly over the next month. By using futures, it is possible to take advantage of their positions, increasing the amount by 20 or even 50 times.

For this strategy, it is impossible not to mention the risks. What if in the following days the market suddenly dropped by 2% or 5%, a fairly frequent occurrence with Bitcoin. If this happens, the position will be liquidated or forced to terminate. That is, even if the market rebounds shortly thereafter, there is no second chance for the options holder.

Benefits of the option buyer

The above example shows that the option buyer paid up ahead of the $ 450 premium for the Bitcoin purchase option with a fixed price of $ 7,500 on April 24. Buyers have a downside limit of $ 450, while the Their upside is unlimited.

The upfront fee for an option depends on:

Current Bitcoin price: If Bitcoin is trading at $ 5,000 and expires in 10 days, an option with a strike price of $ 9,000 will most likely cost under $ 40. On the other hand, a price of $ 4,000 will cause buyers to return $ 1,100 or more.

The days to maturity: The higher the number of days until maturity, the higher the price of the put option. Assuming both have the same execution price, the one with the longest shelf life will tend to be much more expensive.

Recent fluctuations: If the price has fluctuated greatly in the last 30 or 60 days, the odds of appreciating significantly are low. Low volatility results in lower options when compared to the high volatility scenario.

Interest rate: A high interest rate will lead to excessive premiums of options. Fortunately, that happened, because the cost of borrowing money is now near zero.

Source: deribit

Because Bitcoin is trading at $ 6,660 on March 26, one would expect the execution price to be $ 6,000 for a call option priced at $ 800 and up. On the other hand, a price of $ 11,000 in just 28 days seems quite unlikely, so it's a price of $ 90.

It seems unreasonable to sell a call option with unlimited downside in exchange for a fixed upfront. Except, that is not the case if the investor already owns Bitcoin. From this new perspective, sellers are more likely to be paid than regular sales.

Buy a put option

A put option gives the buyer the opportunity to sell Bitcoin at an agreed price at a future date. Again, buyers pay a prepaid premium for this privilege. Instead of using a stop loss order on a regular exchange, a holder can reduce their losses from a discount using options contracts.

With Bitcoin currently trading near $ 6,660, the $ 6,000 option contract expires after 27 days priced at $ 440. If Bitcoin drops to $ 5,000, the investor can then make sales at a predetermined price of $ 6,000, resulting in a net loss of only $ 170.

Investors tend to consider this strategy as insurance. If the price of Bitcoin does not fall below the $ 6,000 price, investors do not have to pay 6.5% premium for anything. On the other hand, their upside has dropped by $ 440, although it's still not limited.

Options offer an almost infinite limit on investment strategies

The fact that the option buyer has an unlimited advantage - and unlike a futures contract, which can force liquidation during the transaction - should be a great incentive for retail traders to use it more often.

In addition to the basic methods described above, there are other ways to trade options, including strategies that combine different rates and terms. Organized traders have long leveraged such tools and this allows them to spend time off-screen and prepare for various investments by reducing the risk of their positions.

Trinh Nguyen

According to Cointelegraph

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