What is a Bitcoin option?
An “option” is a type of derivative contract that gives the owner the option (not the obligation) to buy or sell an asset at a specified price (the strike price) within a predetermined time (the expiry date).
While the term “derivative contract” typically conjures ideas of complicated financial instruments cooked up in Wall Street labs, contracts similar to options have been in use since at least ancient Greece to speculate on the olive harvest, and they span across cultures, exemplified by the 17th century Japanese “Dojima Rice Exchange.” Today, options contribute to a global derivatives market estimated to be over $500 trillion. So, why are options such a long-standing and massive staple in finance, and what does the rise of Bitcoin (BTC) options mean for crypto?
At an individual level, options allow market participants to generate income, make speculative bets, and hedge their positions, particularly amid market volatility. In an option contract, there is a “writer,” or seller, of the option and a buyer. The buyer pays a premium for the options contract determined by factors including moneyness (the asset’s current price vs. the strike price), time to expiry, and implied volatility; the writer then takes that premium as income.
When applied to Bitcoin, this has huge benefits for many players in the ecosystem: Long-term hodlers and miners can effectively hedge their positions and earn income by selling options, and speculators can limit downside risks and get upside exposure for a fraction of the cost.
Looking at the market as a whole, options have also been shown to be critical for market health. According to an oft-cited empirical analysis by the Journal of Finance, options listings for an asset lead to “a decrease in the spread and increases in quoted depth, trading volume, trading frequency, and transaction size” and, overall, results suggest “that option listings improve the market quality of the underlying stocks.” In other words, Bitcoin options can benefit the entire ecosystem, whether a specific individual uses them or not.
More: https://links.bitbullcapital.com/bitcoinoptions-explained