How to trade bitcoin with leverage and not worry about liquidation

How to trade bitcoin with leverage and not worry about liquidation    

Market analysis

Institutional traders have long known the benefits of trading derivatives, including leverage and hedging. By trading in option markets, maximum profits and losses can be specified even with volatile assets such as Bitcoin ( BTC ) .           

Although these instruments are far more complex, traders can make profits regardless of what happens in the next few weeks or even months. This is crucial for the security of the traders in order to achieve optimal performance.

Retailers have begun only recently, derivatives use , although they have focused almost exclusively on futures contracts of BitMEX , OKEx , Binance offered and many others. The main problem here is the liquidation risk, since cryptocurrencies are incredibly volatile .               

Purchase option? Here are the costs and benefits 

The buyer of a call option can buy Bitcoin at a fixed price at a fixed price . For this privilege, the buyer pays an upfront premium to the call option seller. Contracts have a fixed due date and strike price, so everyone knows potential gains and losses in advance.      

If Bitcoin gains in value in the following hours or days, the price paid for this call option should increase. The buyer could either sell this option contract and close his position at a profit, or wait until the contract expires.   

The stated contract date and timing of the buyer of the call option can Bitcoin to the previously agreed price to purchase . Remember that the buyer paid a premium in advance for this right. If the price of Bitcoin is currently below the contract price , the buyer can go away. Therefore, it is primarily referred to as an “option”.           

Each exchange sets its minimum trade size, although a 0.1 bitcoin contract tends to be the lowest number.  

Advantages of Bitcoin options compared to futures contracts  

The main advantage for the buyer of an option is that he knows the maximum loss in advance and does not have to worry about his position being closed in advance. 

Let's imagine a scenario where an investor has $ 500 and expects Bitcoin's price to rise significantly next month. By using futures contracts, it is possible to use their position and increase profits by 20 times or even 50 times.   

It should also be said that this strategy is risky. What happens if the market suddenly drops 2% or 5% in the next few days, an occurrence quite often with Bitcoin . In this case, the position is liquidated or terminated by force. This means that even if the markets recover shortly afterwards, there is no second chance for the option holder.         

The buyer of the BTC call option returns

Theoretical return for a call option buyer

The above example shows that the buyer of the call option paid in advance a premium of $ 450 for the option to purchase a Bitcoin at a fixed price of $ 7,500 on April 24 . The buyer has a limited disadvantage of $ 450 while his benefit is unlimited.    

The premium paid in advance for a call option depends on:

Current Bitcoin- Price: If Bitcoin is traded at 5,000 USD The execution in 10 days, costing a call option with an exercise price $ 9,000 probably less than 40 USD. On the other hand, a strike of $ 4,000 should reset the buyer to $ 1,100 or more.      

Days to Maturity: The higher the number of days to maturity, the higher the price of a call option. Assuming that both have the same exercise price, the one with the longest expiration tends to cost a lot more.  

Recent volatility: If the price has not fluctuated very much in the past 30 or 60 days, the chances of a significant price increase are slim. Low volatility means that call option prices are lower compared to a scenario with high volatility.  

Interest rate: A high interest rate would lead to excessive premiums for options. Fortunately, this was not the case since borrowing costs are currently close to zero.  

Screenshot of the call option prices on March 26th. Source: Deribit 

With Bitcoin trading at $ 6,730 on March 26, a strike of $ 6,000 should be expected for a call option that costs $ 800 or more. On the other hand, it seems rather unlikely that an exercise price of $ 11,000 will be reached in just 28 days, hence the price of $ 90.   

Selling an unlimited disadvantage call option for a fixed prepayment may seem inappropriate. However, this is not the case if the investor already owns Bitcoin . From this new perspective, the call option seller may be paid more than a regular sale.     

Buying a put protection option

A put option offers the buyer the opportunity to sell Bitcoin at a previously agreed price at a later date . For this privilege, the buyer pays an advance bonus again . Instead of using a stop-loss order on a regular stock exchange, an owner can reduce his losses from a drop in prices using option contracts.        

With Bitcoin currently trading near $ 6,730, a $ 6,000 put option contract that expires in 27 days costs $ 440. If Bitcoin drops to $ 5,000, that investor can make a sale at a fixed 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 strike price of $ 6,000, the investor paid a premium of 6.5% for nothing. However, their upward trend has been reduced by $ 440, although it remains unlimited.    

Options offer an almost endless limit of investment strategies

The fact that a buyer of call options has an unlimited advantage - and unlike futures contracts cannot be liquidated during trading - should be an excellent incentive that encourages retailers to use them more often.

In addition to the basic methods described above, options trading offers much more, including strategies that combine different strikes and maturities. Institutional traders have long used these tools to take their time off the screen and prepare for various investment scenarios by securing their positions