Bitcoin Options Explained: Calls, Puts and Why Traders Need Them

Bitcoin Options Explained: Calls, Puts and Why Traders Need Them

Bitcoin options often seem like a tool for professionals. In reality, the basics are simple, and every trader should understand them: the options market affects spot and futures more than the chart suggests.

Below we cover calls and puts, strike, premium and expiry, and at the end, how an option can hedge an arbitrage trade.

What a bitcoin option is

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell bitcoin at a pre-agreed price before a certain date.

For this right, the buyer pays the seller a premium. The seller keeps it and takes on the obligation to fulfill the contract if the buyer wants to.

How a call differs from a put

A call is the right to buy, a put is the right to sell. The buyer of a call profits from a rising price, the buyer of a put from a falling one.

What strike, expiry and premium are

• strike - the price at which the asset can be bought or sold under the option
• expiry - the date when the contract expires and is either exercised or expires worthless
• premium - the price of the option itself, paid by the buyer
• intrinsic value - how far the option is already "in the money" relative to the current price
• time value - the part of the premium that melts away as expiry approaches

An "in the money" option is already worth exercising, an "out of the money" one is not yet. The further the strike is from the current price and the closer the expiry, the cheaper the option.

Buying vs selling an option: how the risks differ

The buyer knows their maximum loss in advance - it is the premium. The seller receives the premium right away but can lose much more if the price moves sharply against them.

In our view, it makes more sense for a beginner to start with buying options rather than selling them. Selling requires margin and discipline, and one sharp day can wipe out many months of collected premiums.

What implied volatility is

Implied volatility (IV) is the market's expectation of how much the price will move before expiry. It is "read" from option prices.

High IV makes options more expensive, low IV makes them cheaper. From what we see, IV rises ahead of major events and often deflates sharply after them, even if the price has barely changed.

Where bitcoin options trade

The largest crypto venue for options is Deribit, which holds most of the open interest. Regulated options on bitcoin futures are available on CME.

In the US, options on spot bitcoin ETFs also trade. Options are offered on a number of major crypto exchanges too, but liquidity there is usually more modest.

How to hedge an arbitrage trade with options

An arbitrage trader often keeps a reserve of coins on several exchanges so as not to wait for transfers. This reserve is exposed to a price drop, and a put works as an insurance policy.

Hypothetical example

The numbers below are hypothetical and are only for illustration. Say a trader holds a reserve of 1 BTC on exchanges at a price of $80,000 and buys a one-month put with a 76,000 strike for $700.

Below the strike, the loss stops growing. The cost of the insurance is the $700 premium, which is lost if the market does not fall.

We believe this kind of insurance makes sense for a large reserve and during turbulent periods. For small volumes, the premium and the spreads in the options order book often eat up all the benefit.

Our tools

An option insures your coin reserve, while the trades themselves are easier to find when prices and funding on all exchanges are visible at once. Our arbitrage screener keeps dozens of venues in one window, refreshes quotes every second and shows each gap together with the volume actually behind it. The spread calculator helps you check what survives fees, network costs and slippage at your size. The bot is fully manual. It never connects to your exchange API keys.

To test the tools on a live market, ArbitrageScanner offers one day of free access to the whole ecosystem.

FAQ (Frequently Asked Questions)

1. What is a call option in simple terms?

It is the right to buy bitcoin at a pre-agreed price before the expiry date. The call buyer pays a premium and profits if the price rises above the strike plus the premium.

2. What is a put option?

It is the right to sell bitcoin at the strike before expiry. It is bought as insurance against a decline or as a bet on a drop.

3. How does buying an option differ from selling one?

The buyer risks only the premium. The seller receives the premium right away, but their loss can be much larger if the price moves sharply.

4. What is a strike in options?

It is the price at which the asset can be bought or sold under the option. The value of the contract depends on the distance between the strike and the current price.

5. Where can I trade bitcoin options?

The main crypto venue is Deribit, and regulated options on futures are available on CME. In the US, options on spot bitcoin ETFs also trade.

6. Can you hedge crypto with an option?

Yes, by buying a put. Below the strike, it offsets the decline in your reserve, and the cost of this insurance is the premium paid.

Conclusion

An option is the right to buy (a call) or sell (a put) bitcoin at the strike before expiry in exchange for a premium. The buyer risks only the premium, while the seller risks much more.

For an arbitrage trader, options are above all a way to insure the coin reserve held on exchanges. What matters is the cost of that insurance: the premium, implied volatility and the liquidity of the order book.

IMPORTANT! We are software developers. We do not give recommendations or promises of earnings and we do not advise you to invest your money anywhere. Our software is fully manual, all your money stays under your own control. We show examples of how our clients have earned on arbitrage in the past, but we do not advise repeating those actions one to one. Your earnings depend solely on your own actions and on market factors.