Analyze the Bitcoin option prices

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The options are somewhat difficult to understand along with the other financial instruments. So here’s how to analyze the prices for Bitcoin options in Binance.

Binance, the largest and most important crypto exchange in the world, offers the function of option contracts. Trading these tools can be very intimidating. We therefore do not recommend entering the world of crypto trading with little experience.

The financial language and the necessary technical knowledge make derivatives unattainable for many beginners.

In contrast to futures or the spot and the traditional market, traders have to deal with 4 different main variables in option contracts. As they are:

  1. The type of option.
  2. Underlying and base price.
  3. Expiration time.
  4. Price volatility.

Differences between BTC options and BTC futures

First of all, we have to remove all doubts about future and option contracts.

Although this type of financial instrument may be new to most of us, it has been around traditional markets for some time. So we know that it can be very confusing to distinguish between these two.

BTC options are financial instruments that are derived or based on an underlying value such as the price of Bitcoin. So you don’t really own the tokens.

In addition, the options contract gives the trader the opportunity to buy or sell the underlying assets at the end of the contract. For this reason, it bears the option name.

On the other hand, futures behave similarly, with the difference that the trader is unable to buy or sell the underlying asset at the expiry date of the contract.

How do I analyze Bitcoin option prices on Binance?

1. Option type

Options can be divided into several types depending on the supply and demand. However, the two most important are:

  • European style: The call or put option can only be exercised on the expiry date.
  • American style: The option can be exercised by the contract holder at any time before the expiry date.

However, on the Binance option platform, the option contracts will only be in the American style. This feature is very important and differentiates crypto options from others in the traditional market.

This is due to the same price volatility that is inherent in cryptocurrencies. Thirty days could be quite a long time, as the crypto market fell from $ 14,000 to $ 3,000 over that period. Therefore, this possibility is excluded because it is in the American style.

For Bitcoin options on Binance, the crypto exchange is the main liquidity provider for the product. This means that the Binance options are almost unlimited and users always have offers whenever they want.

2. Price of the underlying asset and exercise price

The second main variable to analyze the prices of Bitcoin options in Binance is the price of the underlying asset as well as the exercise price.

Remember that the underlying asset is not actually owned when you purchase an option, at least until the expiry date when we have the “option” to buy it or not. The price of the underlying is therefore crucial in order to be able to analyze the prices of these financial derivatives.

The relationship between the strike price and the price of the underlying affects the “option premium” or, in short, the benefit we will have from selling or buying the contract.

For example, for Bitcoin options, if the price of each BTC token rises, the price of call option contracts (CALL) increases, while put options (PUTS) should decrease. And the opposite would happen if the price of Bitcoin went down.

Option bonuses

This relationship between the exercise price of an option and the price of its underlying is also known as “Money”.

Source: Binance blog
Source: Binance blog

Another term we will learn is “out of money” and “out of money”. This describes the relationship between the 2 prices or “Money”.

For example, a Bitcoin option in Buy Binance (CALL) is in the out-of-the-money area if its strike price is above the price of the underlying asset. And it is the reverse case if the option is (PULL). As we see in the photo.

If the strike price equals the price of the underlying, it is referred to as “at-the-money”. A call option is again “in the money” if its strike price is below the price of the underlying asset.

With this tool, we can make money from Binance’s Bitcoin options. For example, a CALL option outside the money has a discount compared to the “at the money” and “in the money” options. This is because they are more likely to reach the expiration date with no value.

Therefore, in the Bitcoin options for Binance, users can only select an exercise price that corresponds to the price of the perpetual BTC / USDT contract for Binance futures. In addition, the crypto exchange ensures that contracts are always “on the money” so that no errors occur.

3. Expiry time

Bitcoin options on Binance are typically used by experienced traders as an option to hedge against market volatility, which can have a negative impact on the value of an underlying.

There are several predetermined dates on the options market for an option to expire, and this expiration dates directly affect the premium or profit of an option contract.

“For example, a 10-minute call option at Binance would cost around $ 10, while a 24-hour call option could cost $ 150. In other words, the longer the duration, the more money it will cost.” The Binance team expresses.

However, on the Binance options platform, the crypto exchange offers contracts with a short term of 10 minutes to 1 day. This allows users to trade expiration windows every 10 minutes, as the high volatility of the crypto market is no secret to anyone.

As we can see, the expiration time can be observed in the Binance app. Source: Binance blog
As we can see, the expiration time can be observed in the Binance app. Source: Binance blog

4. Price volatility

The last factor we need to analyze Bitcoin option prices on Binance is price volatility. Within the Bitcoin crypto market, this variable is very present in all areas of the crypto.

Volatility is called the price fluctuation of the underlying. Higher volatility means greater price fluctuations and ultimately more risk and reward for the investor who owns the underlying asset.

Many, both inside and outside the crypto ecosystem, see volatility in a bad light. Thanks to this, Bitcoin is so striking to many institutional investors that it ultimately benefits the entire crypto ecosystem.

As Binance shows, the sharp price fluctuations in BTC up to mid-March triggered by the coronavirus crisis led to a sudden increase in volatility. As a result, volatility normalized with decreasing price fluctuations.

And volatility plays a big role in the option price. When there are more risks, options become more expensive as option sellers charge more premiums to take more risks.

Not for everyone

While we have the ability to trade Bitcoin options in Binance in our hands, the reality is that juicy rewards can be earned in this world. At the same time, if you don’t have the experience, you can lose all the money in seconds.

Therefore, this type of trading is not for everyone. However, this can be the first step for you to enter this world.

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