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Just like regular options, Bitcoin options are financial derivatives that give buyers the right, but not the obligation, to buy (call option) or sell (put option) Bitcoin at a set price before a specific expiration date. They allow traders to speculate on Bitcoin’s price without owning the asset directly.

Traders and investors are now looking to engage with Bitcoin in a more strategic and flexible way, and that is through Bitcoin options. These financial derivatives offer a unique opportunity to speculate on Bitcoin’s price movementswithout owning the cryptocurrency directly.

This article will explore the core concepts of Bitcoin options, from the basics of how they work to advanced strategies used by companies like Metaplanet, which generated substantial income through Bitcoin pool options. We'll also dive into the risks associated with these strategies, compare them with other well-known Bitcoin investment methods like MicroStrategy's leveraged approach, and highlight the growing opportunities in Bitcoin ETF options.

What are Bitcoin options?

Bitcoin options are financial derivatives that give the buyer the right, but not the obligation, to buy or sell Bitcoin at a predetermined price on or before a specific expiration date. These instruments allow traders to speculate on the price movements of Bitcoin without having to own the cryptocurrency outright.

Bitcoin options come in two types: call options, which give the right to buy Bitcoin, and put options, which give the right to sell Bitcoin.

Bitcoin options can be traded on specialized crypto exchanges, offering significant flexibility to both retail and institutional investors. This flexibility is valuable in managing risk, speculating on price movements, or hedging existing positions.

What are Bitcoin pool options?

Instead of focusing on individual holdings or Bitcoin contracts, pool options are tied to a collective Bitcoin pool, such as a mining pool or a fund holding Bitcoin. An interesting example is Metaplanet, a Japanese company that sold Bitcoin pool options and earned 24 BTC in premium income (according to the Metaplanet Tracker). By selling pool options, Metaplanet earned a premium for providing the right to others to claim a portion of their Bitcoin holdings, effectively profiting from premium income while holding the asset.

The advantage of this strategy is that companies with large holdings (like Metaplanet) can generate income from their Bitcoin holdings without needing to sell their actual assets, which helps them remain exposed to potential future price appreciation.

Risks of Bitcoin pool options strategy

While the 24 BTC reward earned by Metaplanet sounds too enticing, you must consider the fact that selling Bitcoin pool options also involves several key risks:

Liquidation risk. If the price of Bitcoin rises significantly, the seller of the options is obligated to deliver Bitcoin at the lower strike price. This can result in substantial losses, as the seller must provide Bitcoin at a price below the current market value.
Forced sale at a loss. The terms of the contract might force the pool to sell Bitcoin at a loss if the market price exceeds the strike price, potentially impacting the pool’s overall holdings.
Volatility risk. Bitcoin’s market is known for its extreme volatility. Sudden and unpredictable price fluctuations can increase the cost of fulfilling the options, making this strategy riskier for the issuer.

These risks need to be carefully considered when engaging in pool options strategies, as they can significantly affect profitability.

Strategies using Bitcoin options

Apart from naked selling, Bitcoin options can also be used in the following strategic ways by companies and investors:

Hedging strategies. Investors use Bitcoin options to hedge against price volatility. For instance, a trader holding a large Bitcoin position might buy put options to limit losses if the price drops.
Arbitrage. Some traders exploit the price differences between different Bitcoin markets or exchanges through arbitrage strategies. These involve simultaneously buying and selling Bitcoin in different markets to lock in profit.
Leverage and borrowing. Companies like MicroStrategy pursue a different strategy by borrowing funds to buy Bitcoin. This approach allows them to accumulate large Bitcoin reserves while taking advantage of the cryptocurrency’s long-term growth potential. Unlike Metaplanet’s strategy, which generates income through options, MicroStrategy’s strategy is more speculative and risky, especially if Bitcoin’s price declines significantly and debt payments become harder to meet.

How companies make money with Bitcoin: MicroStrategy vs Metaplanet’s approach

MicroStrategy’s approach for accumulating Bitcoin is centered around leveraged investing, where the company borrows funds to purchase large quantities of Bitcoin. This approach is highly speculative and relies heavily on the assumption that Bitcoin’s value will increase over time. By using debt to finance their Bitcoin acquisitions, MicroStrategy tries to capitalize on the long-term price appreciation of Bitcoin. However, this method carries substantial debt risk, as the company must service the borrowed funds regardless of Bitcoin’s performance. If the price of Bitcoin falls, MicroStrategy faces significant financial pressure due to the potential mismatch between the value of their Bitcoin holdings and the liabilities incurred from borrowing.

In contrast, companies like Metaplanet take a different approach by generating income through Bitcoin pool options. Instead of relying on Bitcoin’s future price increases, Metaplanet earns premium income by selling options to other investors, giving them the right to purchase Bitcoin from the company’s holdings at a predetermined price. This strategy allows Metaplanet to generate consistent cash flow without needing to sell its Bitcoin outright. By focusing on options premiums, Metaplanet benefits from the volatility in Bitcoin’s price without being exposed to the same level of debt risk as MicroStrategy.

The key difference between these two strategies is the nature of risk and reward. MicroStrategy is betting on the long-term price growth of Bitcoin while taking on considerable debt, which could lead to losses if the price drops. Metaplanet, on the other hand, employs a more conservative income-generation model by collecting premiums, benefiting from the current volatility of Bitcoin rather than its future price trajectory. This allows them to avoid the need for direct market speculation or large-scale Bitcoin purchases, making their strategy less dependent on market trends and more focused on immediate income.

Where to trade Bitcoin options

Bitcoin options can be traded on specialized cryptocurrency exchanges, such as:

Cryptocurrency exchanges for Bitcoin options trading
	Min. Deposit, $	Spot Taker fee, %	Spot Maker Fee, %	Foundation year	Open account
OKX	10	0,1	0,08	2017	Open an account Your capital is at risk.
3Commas	10			2017	Open an account Your capital is at risk.
Revox		0,1	0,1	2022	Study review
Bybit	1	0,1	0,1	2018	Open an account Your capital is at risk.
Binance		0,1	0,1	2017	Open an account Your capital is at risk.

Types of crypto options

There are various types of options available on both crypto exchanges and traditional markets:

Bitcoin сall and put options. These standard crypto options allow traders to bet on price movements by purchasing the right to buy or sell Bitcoin at a specific price.
European vs. American options. European options can only be exercised on the expiration date, while American options can be exercised at any time before expiration. Most crypto exchanges offer American-style options.
Bitcoin ETF options. Bitcoin ETF options are derivative contracts tied to Bitcoin Exchange-Traded Funds. These options allow traders to speculate on the performance of Bitcoin ETFs rather than the direct price of Bitcoin. Applications for these options are still under consideration by regulatory bodies like the U.S. SEC, with many traders and institutions eagerly awaiting their approval.

Bitcoin ETF options: a growing opportunity

Bitcoin ETF options have the potential to transform how both retail and institutional investors interact with Bitcoin, offering a bridge between the volatile cryptocurrency market and the more traditional world of regulated financial assets.

A Bitcoin ETF (Exchange-Traded Fund) is a financial product that tracks the price of Bitcoin and trades on traditional stock exchanges, providing investors with a regulated and accessible way to gain exposure to Bitcoin without needing to directly buy, store, or manage the cryptocurrency itself.

The introduction of options on Bitcoin ETFs would take this accessibility a step further by allowing investors to trade options contracts based on these ETFs. This would mean that investors could speculate on or hedge against Bitcoin price movements by using call and put options tied to the ETF, rather than directly engaging with the underlying cryptocurrency. This opens up a variety of opportunities for investors looking for a more familiar and regulated way to engage with Bitcoin's price movements through derivative strategies.

For institutional investors, Bitcoin ETF options represent a major breakthrough. These products would allow for more sophisticated hedging and risk management strategies, similar to what is done with traditional assets. Institutional investors, many of whom are constrained by regulations that prevent them from directly owning cryptocurrencies, would now be able to access Bitcoin’s price performance through a familiar financial instrument.

However, it’s important to note that applications for Bitcoin ETF options are still under review by regulatory bodies, particularly in the United States. The U.S. Securities and Exchange Commission (SEC) has been cautious about approving Bitcoin-related financial products due to concerns over market manipulation, volatility, and the need for adequate investor protections. While several firms have submitted proposals for Bitcoin ETF options, their approval remains uncertain.

Should these options be approved, the impact on Bitcoin’s adoption in mainstream finance could be significant.

Focus on Greeks when using options

When getting started with Bitcoin options, you should pay close attention to time decay (theta) because it behaves differently in the crypto market. Bitcoin’s wild price movements don’t follow a predictable pattern, which means that an option’s value might not drop as steadily as in regular markets. One approach is "gamma scalping," where you adjust your position quickly when Bitcoin prices change sharply. This method helps you make gains from price spikes, even when time is eating into your option’s value. It’s not beginner-level stuff, but if you get it right, it’s a way to stay ahead in a fast-paced market.

You should also keep an eye on "skew trading," which is looking at the difference in implied volatility between options betting on price going up (calls) and those betting on it going down (puts). In Bitcoin, skew tells you a lot about what traders are thinking right now. If a sudden price move makes the skew shift, you might find that one side of the trade is overpriced. For example, if everyone’s betting on Bitcoin falling, puts might become way cheaper than they should be. You can step in and take advantage of that mismatch by selling those puts and balancing your risk with a simple spread. Think of it as picking up on clues that others are overlooking.

Conclusion

Companies and investors use various strategies to make money with Bitcoin, from selling options to leveraging debt for direct investment. Strategies like Bitcoin pool options used by Metaplanet offer a unique way to generate income while retaining Bitcoin exposure. However, these strategies come with risks such as volatility and liquidity challenges. Understanding the different types of options available on crypto exchanges and the traditional market, such as Bitcoin ETF options, allows traders to make informed decisions about engaging with Bitcoin.

FAQs

What are Bitcoin call and put options?

Bitcoin call options give the right to buy Bitcoin, while put options give the right to sell Bitcoin.

How do Bitcoin pool options work?

Pool options allow companies to sell the right to access part of their Bitcoin holdings in exchange for premium income.

What is the difference between MicroStrategy's strategy and pool options?

MicroStrategy invests in Bitcoin using borrowed funds, whereas pool options focus on generating premium income.

Are Bitcoin ETF options available?

Applications for Bitcoin ETF options are still under review by regulators, but approval could lead to their introduction in the market.

Team that worked on the article

Parshwa is a content expert and finance professional possessing deep knowledge of stock and options trading, technical and fundamental analysis, and equity research. As a Chartered Accountant Finalist, Parshwa also has expertise in Forex, crypto trading, and personal taxation. His experience is showcased by a prolific body of over 100 articles on Forex, crypto, equity, and personal finance, alongside personalized advisory roles in tax consultation.

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Chinmay Soni is a financial analyst with more than 5 years of experience in working with stocks, Forex, derivatives, and other assets. As a founder of a boutique research firm and an active researcher, he covers various industries and fields, providing insights backed by statistical data. He is also an educator in the field of finance and technology.

As an author for Traders Union, he contributes his deep analytical insights on various topics, taking into account various aspects.

Mirjan Hipolito is a journalist and news editor at Traders Union. She is an expert crypto writer with five years of experience in the financial markets. Her specialties are daily market news, price predictions, and Initial Coin Offerings (ICO).

Options trading

Options trading is a financial derivative strategy that involves the buying and selling of options contracts, which give traders the right (but not the obligation) to buy or sell an underlying asset at a specified price, known as the strike price, before or on a predetermined expiration date. There are two main types of options: call options, which allow the holder to buy the underlying asset, and put options, which allow the holder to sell the underlying asset.

Investor

An investor is an individual, who invests money in an asset with the expectation that its value would appreciate in the future. The asset can be anything, including a bond, debenture, mutual fund, equity, gold, silver, exchange-traded funds (ETFs), and real-estate property.

Leverage

Forex leverage is a tool enabling traders to control larger positions with a relatively small amount of capital, amplifying potential profits and losses based on the chosen leverage ratio.

Volatility

Volatility refers to the degree of variation or fluctuation in the price or value of a financial asset, such as stocks, bonds, or cryptocurrencies, over a period of time. Higher volatility indicates that an asset's price is experiencing more significant and rapid price swings, while lower volatility suggests relatively stable and gradual price movements.

Fundamental Analysis

Fundamental analysis is a method or tool that investors use that seeks to determine the intrinsic value of a security by examining economic and financial factors. It considers macroeconomic factors such as the state of the economy and industry conditions.

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