When it became clear that Donald Trump won the 2024 US Presidential election the Bitcoin world rejoiced. Meanwhile Bitcoin options traders put their money where their mouth was, so to speak. They purchased call options for Bitcoin at $100,000. On December 4, 2024 the Bitcoin dream of hitting $100,000 came true and savvy options traders cashed in! Looking forward into 2025 and beyond we may well see a continuing Bitcoin rally or we may see substantial retrenchment. How can one take advantage of this potential Bitcoin options opportunity and still limit their risks? The answer lies at the heart of how the pros trade options.
How Do Options Work?
At their most basic, options are pretty simple. There are only two kinds, calls and puts which you either buy or sell. A call contract gives the buyer the right to purchase a stock, futures contract, or cryptocurrency within the time frame specified by the contract. The contract specifies a price which applies no matter if the underlying asset’s market price goes up or down. Because this is an option and not an obligation, the buyer will only make the purchase if the underlying price has moved as they expected.
The buyer of a call option pays a price, a premium, for this right. In general, the idea is to find options contracts that are not very expensive so that the “overhead” of trading options is not overly expensive. And the idea is to be able to accurately predict price movement within the time frame of the contract such as when Bitcoin options traders accurately predicted that a Trump victory would send the senior cryptocurrency over $100,000.
Options Trading Leverage
If you want to make money when you expect the price of Bitcoin to go up you have a couple of choices. First you can buy one BTC when the price is $70,000 and hold on. If the price goes above $100,000 you make $30,000 or 42% on your investment. However, if the price were to fall by $30,000 you would lose 42%. However, if you purchase an options call contract you will not be paying $70,000 but rather a much smaller amount based on the length of the contract and market conditions. For example you may only pay $500 for the contract. If the price goes down you do not exercise the contact and lose $500 instead of $30,000. If the price goes up to $100,000 you exercise the contract and experience a 200 fold profit! For this to work out you need to follow the market, pay attention to available options, etc., but you get the idea.
Alternatively, an options trader can buy a put on a stock, futures contract, or cryptocurrency. The idea in this case is that the buyer expects the price of the underlying asset to fall. The risks and potential benefits are the reverse side of what one sees with buying calls. You make money when you accurately predict that the price will fall and like with calls, you limit your losses when your prediction does not come to pass.
Deep Pockets and Selling Options
If you compare people who only buy options with those who only sell options, it turns out that sellers generally make more money over time. The problem with just selling options is that sellers are obligated to fulfill their part of the bargain no matter how far the price of the underlying asset falls or rises. Thus, there have been many cases of options traders with deep pockets including large banks who have gone bankrupt because of a single bad options trade.
The vast majority of options traders use mixed buying and selling strategies involving calls and puts. By using such strategies professional options traders can reliably make modest profits while avoiding devastating losses.
What Is Bitcoin’s Next Price Target?
Bloomberg wrote about how options traders bet on Bitcoin hitting $100,000. For there to be another big jump in Bitcoin’s price there needs to be a reason such as massive deregulation, Trump’s dream of a Bitcoin stockpile come to life, or something similar. Because Bitcoin has shown itself just as likely to fall as rise over the short term, using options to limit risk would seem to be a better approach over the short term than simply buying and hanging on.