Delta hedging is an advanced risk management strategy that allows investors and traders to offset downside risk by using options contracts. Learn more here.

If you're new to long-term trading and investing, you'll likely encounter instances when a catalyst causes huge volatility in your portfolio. While this might be acceptable for risk-tolerant individuals who are investing in growth-oriented assets, it's often advisable for investors to take up hedges to mitigate the risk exposure in one's crypto portfolio. That's where 

Curious as to how hedging works and how advanced investors take this to the next level with delta hedging? Find out how fund owners are limiting their risk exposure and engaging the use of 

 with our beginner's guide to delta hedging in crypto portfolios.

Before diving headfirst into the world of delta hedging for crypto portfolios, it's key to first grasp the mechanics of hedging prior to discussing the use of derivatives to execute such a risk management strategy. 

For the uninformed, hedging strategies are similar to adopting an insurance policy for your vehicle in a road accident–prone area. While you can't entirely avoid the possibility of getting into a road accident when there's an inherent risk with driving in the area, you can cushion the potential blow with a hedging risk management strategy. Although mitigating the risk does cost a part of your profit, it's definitely a worthwhile cost if the volatility causes you to lose a huge portion of your portfolio.

While hedging includes the use of any financial instrument, investors often employ the use of derivatives because of the clear relationship between the portfolio asset and the contract from which it derives. By using derivatives like options contracts, delta hedging comes into play. From delta-neutral positions to hedging your underlying position, here's everything you'll need to know when it comes to learning about the in-depth mechanics of delta hedging your portfolio.

For those new to options trading, you'll certainly want to read up on our comprehensive 

 first before embarking on this journey to educate yourself about options. For starters, delta is one of the four 

, and is a useful risk metric that estimates the change in price of an options contract, given a $1 or basis point change in its underlying asset. This means that for every $1 that the asset rises, the option price rises by the delta amount. 

That said, it's important to understand how delta works for underlying assets and their derivatives. 

 have a positive delta that ranges from 0 to 1, with at-the-money calls having a delta of 0.5. Conversely, 

 have a negative delta that ranges from −1 to 0, with at-the-money puts having a delta of −0.5. Meanwhile, underlying assets like stocks and crypto have a delta of 1.

Now that we understand the basics of delta, let's move on to delta hedging a crypto portfolio with calls and puts. For the following section, we'll be classifying the options into three distinct categories and listing specific delta hedging examples so you're aware of how you can delta hedge your crypto portfolio accordingly.

In-the-money options refers to derivative contracts with both intrinsic and extrinsic value. When exercised, these contracts have strike prices that are favorable when compared to the current market price for an asset. This means that at expiration, traders who own the contract will be able to either buy the asset at a lower price or sell it at a higher price, depending on whether the option contract is a call or put contract. More on this will be explained below.

In-the-money call options are purchased by traders because they believe the market price of the asset is currently undervalued, and will exceed the current strike price of the asset at expiration. For example, if the current market price of ETH is $1,770, buying an in-the-money call means purchasing a call option with a strike price of $1,700 or less. When the call option expires, you'll be able to buy 1 ETH at a discount of $70 or more because the contract expired in-the-money.

Let's say you're already short 3 ETH. To hedge this position, we could look at an in-the-money contract, such as the 1500c ETH 28042023 option that has a delta of 0.81. To delta hedge your position, you'll want to buy 3 of these ETH calls. This is so the negative delta of the ETH short position is partially balanced out by the call you've just purchased. Specifically, your delta exposure is reduced to 0.57, or by about 81%.

Conversely, traders tend to buy put options because they think the market price of an asset will be lower than the strike price of the put contract at expiration. For example, if the current market price of ETH is $1,770, buying an in-the-money put means purchasing a put option with a strike price of $1,800 or more. When the put option expires, you'll be able to sell 1 ETH at a premium of $30 or more because the contract expired in-the-money.

As the price continues to fall for ETH, the premium for these put options will appreciate as they become more in-the-money. The reverse is also true, as the puts tend to become less valuable if the price of ETH appreciates.

Let's say you've already bought an ETH put, and want to delta hedge your ETH put contract. To begin, you'll first want to consider its delta. For reference, we'll be using the 2000p ETH 28042023 contract that has −0.67 delta. To properly delta hedge this position, you'll need to place a long order of 0.67 ETH.

As previously mentioned, at-the-money calls and puts have a delta of 0.5 and −0.5, respectively. Using the example of options contracts for ETH, buying an at-the-money call or put means purchasing contracts that have an $1,800 strike price. You'll notice that while both contracts don’t have exactly 0.5 and −0.5 delta, they still numerically add up to 1.

To set up a delta hedging strategy, simply short-sell 0.52 ETH if you're longing a call, or buy 0.48 ETH if you're longing a put.

Out-of-the-money options refers to derivative contracts with only extrinsic value. At expiration, if the current market price of the asset isn't above the strike price of the call option or below the strike price of the put option, then the option 

. This ultimately makes the price of these options contracts dependent upon their time to expiration. 

In terms of options Greeks, this is where theta comes into play, with each passing day contributing to the decay of the option. Understanding theta decay aside, here's how you can delta hedge your positions when trading out-of-the-money option contracts.

The good thing about trying to delta hedge out-of-the-money call options is that you'll require less capital to offset the directional risk of these option contracts. This is mainly because of their low delta value, whereby their option premiums vary less when there's a dollar change in the underlying asset price. In this case of ETH out-of-the-money calls, let's look at hedging a 2000c ETH 28042023 contract. With a delta of 0.33, you'll only need to short-sell 0.33 ETH in order to delta hedge your position.

Similarly, due to their low delta value, delta hedging out-of-the-money put options is less capital intensive. To delta hedge a 1500p ETH 28042023 contract, you'll need to buy 0.18 ETH to balance out your positions.

If you've gone through our previously mentioned examples, you'll realize they're a mix of partial delta hedging — where a percentage of the directional risk is mitigated — and full delta hedging, where the net delta exposure is zero. For portfolios with net zero delta, delta neutrality is achieved. Thanks to the careful balancing of positive and negative deltas, traders can end up with a delta-neutral position that takes into account potential upcoming catalysts and short-term risks.

Benefits of Delta Hedging Your Crypto Portfolio

The most important aspect of delta hedging your portfolio is that it can be profitable for you if you hedge strategically. By taking into account the aforementioned theta decay and lower implied volatility upon the passing of a major catalyst, option premiums tend to fall over time. This can play into your favor if you're using hedging options as a short-term way for you to mitigate volatility.

The second benefit of delta hedging is that it allows you to protect your portfolio from downside risk without causing you to close or trim your positions. After all, time in the market beats timing the market — so trying to constantly enter and exit positions can prove costly in the long run, as your portfolio can be affected by 

Risks of Delta Hedging Your Crypto Portfolio

That said, delta hedging does come with some downsides. Although it can be beneficial for your portfolio, delta hedging can prove costly, thanks to the constant position tinkering involved. This can result in costly transactional fees and wasted time as you're concurrently balancing deltas and making sure the portfolio is delta neutral.

Another understated risk of delta hedging is the fact that hedging is ultimately subjective — which can result in overhedging. This is a situation where traders preemptively overtime the downside risk and spend excess to hedge their portfolio. The end result is a huge delta hedge that eats into profits without taking into account the directional risk involved.

Is It Profitable to Delta Hedge Your Crypto Portfolio?

There's much discussion to be had when it comes to profitability from delta hedging one's portfolio. As previously mentioned, it can be healthy for your crypto portfolio if you're delta hedging, but it requires keen decision-making and knowledge of options mechanics to make it worthwhile. Ultimately, the decision to delta hedge your crypto portfolio comes down to your personal preference, and whether the potential profit and protection from volatility are worth the time and effort you put in.

All in all, delta hedging should definitely be attempted if you're well-versed in both options trading and the mechanics that go into their premium pricing. While seen as a huge time sink by some, delta hedging acts like actively managed insurance for more risk-conscious investors and traders. Since it requires constant vigilance and up-to-date information on the markets, delta hedging is certainly not for the faint of heart. However, look past its intricacies and you'll discover a hugely useful risk-mitigation strategy that shields your portfolio from downside costs, without the risk of unwinding your existing positions.

For more on learning about options, please check out our in-depth article that covers the mechanics of 

. Alternatively, if you're interested in mastering risk management, our guide to 

 will suit your needs. Get started with trading 

Intermediate

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What Is Delta Hedging & How Does It Work In Crypto?

Dopex is a decentralized options protocol that seeks to passively maximize liquidity for option buyers, minimize losses for option writers, and maximize gains for option buyers.

Ask most people their preferred investment vehicle in cryptocurrencies and stocks, and rarely will you find people going for options trading as their first choice.

Indeed, this investment niche has remained largely underpopulated, primarily due to the assumption that it's a complex niche best left to professional traders and wall street gurus.

Furthermore, the few who understand the basics of options find trading them on traditional exchanges and 

Let’s dig deep into the Dopex project and how it’s leveraging blockchain technology to simplify options trading.

Options are investment tools that allow you to either leverage or hedge a position in a given market to generate a return or limit downside risk

 is popular in the stock market. However, interest in crypto options trading has grown tremendously, especially among traders looking to survive the 

A crypto options contract is an agreement to sell or buy an underlying asset at a specific price (the strike price) within a given time frame or upon expiration

Essentially, there are two types of options: the 

the asset at the strike price. Usually, if an investor believes that the price of the asset will go up, they enter into a call option contract and go for a put option contract if they expect the price to go down.

For both calls and puts, you will pay an option price, the "premium," to the option writer in exchange for the right to the option contract. 

 writes an option by creating a new option contract to sell a trader the right to buy or sell an asset at the strike price on the expiration date, and collects the premium from the option buyer. 

You choose to trade crypto options if you want to make a considerable profit with limited downside risk, or when you’re tired of stop-loss hunting or constant liquidation, which is common in spots or futures crypto trading.

You can also choose to buy options if you anticipate a significant price movement due to increased volatility in the market. On the other hand, option writers also offer to sell options to collect premiums from buyers when they expect limited price movement.

Crypto options are similar to stock options in that they’re both used as 

, and you profit from the market moving in your favor. 

However, unlike stock options, you aren’t required to buy or sell the underlying asset upon the expiration of the crypto options contract.

Now that you understand the basics of options trading, let’s switch gears to Dopex and see why it’s a protocol to watch in the crypto options trading niche.

As an improvement of the current options market, Dopex offers a suite of 

 (DeFi) products, such as collateral borrowing and staking in option pools. It also utilizes a highly efficient pricing strategy to allow options traders to take advantage of immediate options 

Deribit, among the most prominent centralizedcrypto options exchanges, targets institutional investors and more seasoned traders. As such, there’s a gap in the ever-growing options retail niche that Dopex aims to fill by providing a retail-focused, user-friendly platform with products designed to suit even beginners in crypto options trading.

To achieve this, Dopex’s UX is clean and intuitive, with no needless complexities and lengthy onboarding processes.

 Ethereum scaling solution famous for its advanced security and fast transactions at dramatically low gas fees. However, Dopex also has 

 addresses that allow interaction with other blockchains, such as 

Powered by a dual token system consisting of DPX and rDPX, Dopex’s ecosystem allows its users to interact with the platform in a structured and synergistic way for a wholesome options trading experience.

Dopex’s architecture is designed to provide value for all the players in the ecosystem. As a decentralized protocol, Dopex has the advantage of composability, which allows it to package and interface multiple products to ensure capital efficiency 

 a more challenging feature for CEXs to enact.

Let’s look at how the platform’s core products are built to ensure that the target demographic (that is, the retail investors) can make the most out of DeFi options trading.

 (SSOVs), Dopex's flagship product, work similarly to conventional 

 of crypto assets. An SSOV allows you to lock up your assets for a specified period and earn yield from the staked assets. It lets you sell 

Essentially, when you deposit money into an SSOV (it takes only five clicks to do so), the respective smart contract sells your deposits as European-style covered call 

options to interested buyers at set strike prices that expire at the end of the particular epoch (cycle), either weekly or monthly.

Let's say you’ve decided to write DPX call options for the epoch, and have deposited to the appropriate SSOV at your selected strike price. The vault will immediately present the covered calls in the UI, where option buyers can choose to buy those call options at the strike prices you’ve selected.

The vault allows you to farm vault incentives while also earning from the premium, which comes from selling your covered options to buyers, thereby raising your APR. However, you also risk the option buyers claiming some of your tokens at the end of the epoch if the token price is above the strike price. Hence, a higher APR comes with a higher risk.

There are two sides to an SSOV: writers (covered in the above example) and option buyers. As an option buyer, you get to purchase call options in that epoch and pay a premium that will be credited to the writers. Since Dopex only offers European options, you must wait for expiration to exercise the trade.

 the strike price (in the money), you make a profit. However, if the market moves against you (out of the money), you’ll earn nothing from your purchased options, while still paying the writer the premium.

One of the constraints of SSOVs is that option buyers cannot exit positions mid-epoch and must wait until expiration for settlement. Dopex Option Liquidity Pools (OLP) are built on top of SSOVs, acting as a secondary marketplace for Dopex option contracts. OLPs allow liquidity providers to select a discount rate at which option holders can sell their options anytime. Liquidity providers benefit from discounted options, while option holders benefit from mid-epoch exits.

OLPs provide solutions to some of the nuisances of SSOVs, which include illiquid options positions, non-recyclable liquidity and inability to purchase options mid-epoch.

Dopex also offers the Atlantic Option, a type of DeFi options product with a fixed expiration (similar to European Options) which allows the collateral deposited by the option creator/seller to be borrowed by the buyer of the option at a fee.

The borrowing of collateral is gated through Dopex Atlantic contracts, meaning funds can only be used for pre-specified scenarios. This allows for direct integration with DeFi protocols such as 

 to protect leveraged traders from liquidation. Other DEXs can also integrate 

 strategies, enabling traders to profit from price volatility.

Atlantic Options provide utility for otherwise idle option collateral and allow for an additional source of yield for option writers, while creating unique DeFi products powered by composability.

Dopex’s ecosystem dynamics are powered by two distinct tokens: DPX and rDPX.

DPX is the vanilla governance token for the Dopex protocol and has a finite token supply of 500,000. As a governance token, it’s used to decide on proposals about the weights of DPX rewards, rDPX rebate amounts, SSOV strike prices, and the removal/slashing of delegates.

It’s also used to accrue fees from pools and vaults after every epoch. DPX’s emission schedule and allocation are shown below:

DPX entered the market at $95.83 in June 2021. It performed well in the five months after its launch, experiencing more than a 2,500% increase in price by the end of November 2021.

After a slight price correction in early December, DPX began to rally in a price pump as the project prepared to add more asset classes to its SSOV product and to launch its Atlantic Options.

Following the Atlantic Options launch announcement, DPX spiked to hit an all-time high on Jan 15, 2022, hitting $4,215.41. In the following months, Dopex’s price corrected before rallying again briefly when Dopex launched SSOV v3 in April.

Dopex wasn't spared from the infamous de-pegging of TerraUSD (UST) in May 2022, as DPX plunged to $385.14 on May 13. Since then, DPX has been trading sideways, and the Dopex price chart has yet to show much movement.

PricePrediction experts are highly bullish about Dopex’s price. 

, DPX could exceed $1,000 by 2025 and surpass its all-time high to hit a maximum price of $5,619.01 by 2029.

 share a bullish outlook, believing DPX will hit a maximum of $1,342.30 in 2025. However, they expect slower growth, with Dopex’s price reaching $2,769.48 in 2029.

Despite these enticing price predictions, we do not offer them as financial advice. Rather, we highly recommend that you do your own research before investing in any cryptocurrency.

While the crypto options trading niche is still nascent, Dopex has a lot going on that’s already caught the attention of investors and players in the industry. By focusing on the retail demographic that’s been largely isolated from the current options market, Dopex has a lot of room to grow.

Furthermore, Dopex has collaborated with 

 as an underlying asset in its SSOV, which could up the project's potential, especially with the upcoming 

. Also, the move by Dopex to integrate its Atlantic suite of products with GMX will open many other opportunities for its users.

With the market cap of crypto options projects growing by the day, Dopex holds a lot of potential. Its tokens are loaded with intrinsic utility that will help even options beginners who want to invest in the project.

DPX is available on leading crypto exchanges such as Bybit. You can buy DPX on Bybit by creating an account on the platform and funding it with USDT. Once funded, you can trade the 

 Spot trading pair on Bybit’s intuitive trading terminal.

The DPX/USDT listing opens with not one but 

! The 195 DPX prize pool event runs from Feb 27 to Mar 13, 2023, where all you have to do is deposit 0.4 DPX into your Spot Account to earn 0.1 DPX. You can also stake to earn up to 60% APY with the 135 DPX prize pool event from Feb 28 to Mar 30, 2023.

Dopex has created a platform that makes it simple and lucrative to venture into crypto options trading, even for retail investors, with its intuitive and user-friendly UX design. Its products, such as SSOVs and Atlantic Options, offer investors lucrative options trading opportunities by providing maximum liquidity and reducing losses.

With improved capital efficiency through its options liquidity pools and a host of other DeFi products, Dopex is bringing the vision of decentralization to life.

As the crypto options market grows, Dopex is one project to watch due to its innovative and retail-specific approach to the sector.

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Dopex (DPX): Simplifying your Options Trading

Should you be trading futures or options? Learn the difference and start profiting based on the trading instrument that suits you best. 

Trading in the financial markets can be an exciting and rewarding experience. With many available options, deciding which route to take can be challenging. Futures and options contracts are investment options with the potential to generate leveraged returns. Both are derivatives — financial instruments that derive their value from an underlying asset such as a stock, commodity or cryptocurrency. However, these two financial tools differ significantly and cater to different types of investors. So, which of them is the best for your investment goals?

In this article, we'll break down the differences between futures and options contracts to help you determine which is right for you. So buckle up and get ready to unlock the potential of these powerful financial instruments.

 are agreements between two parties to buy or sell an underlying asset at a predetermined price and specific date in the future. Futures contracts allow investors to trade cryptocurrency without actually owning them. 

Crypto futures contracts share similarities to traditional futures contracts but use cryptocurrency as the underlying asset. But unlike their conventional counterparts, crypto futures are characterized by high volatility, leverage and 24/7 trading.

Crypto futures offer investors the potential to profit from rising and falling markets, making them an attractive investment opportunity for those who have a good understanding of the crypto market and are comfortable with the added risk.

Traders can take a long or short position, depending on their outlook. Long positions are a common practice for traders who predict a price increase; however, traders short a position in the hope of benefiting from the price declines.

If the position is held until maturity, the trader will gain or lose depending on the settlement price at maturity. At maturity, the settlement price is determined by the spot price of the underlying cryptocurrency. If the trader closes the futures position before maturity, the profit or loss depends on futures market prices at the time of unwinding.

Unlike spot or cash assets, futures typically operate "on margin," allowing traders to gain exposure to larger gains with relatively small capital.

Futures are typically (but not always) contracts based on the price of an asset at a specified future date (forward contract).

Like traditional futures contracts, standard crypto futures contracts govern trades in cryptocurrency at an agreed-upon price and predetermined date. They're similar to standard futures contracts in conventional markets with similar expiry and settlement mechanisms. 

Traditionally, expiration dates occur monthly (serial) or every three months (quarterly). At the time of expiration, the position is closed via a settlement process (more on that below). For example, the CME Group launched Bitcoin futures contracts that are cash-settled every three months in USD.

When trading standard futures, you should remember this: 

To do this, you must close your position in the active contract (front month) and open a corresponding position in a further forward futures contract (back month) 

Another thing to consider is that asset prices usually change over time. For this reason, futures contracts are priced using a forward curve.

For assets that are expected to rally over time, the price of forward contracts rises as they move further into the future (contango). 

Whereas for assets expected to plunge, the price of forward contracts falls as they move further into the future (backwardation). Because of this, the prices of different maturities (expiration dates) can fluctuate dramatically, making it challenging to manage a long-term position — especially when the contract is close to expiry (run-off).

Physical delivery futures are futures contracts where the underlying cryptocurrency is physically delivered to the buyer at the end of the contract. This type of contract is designed for those who want to take actual ownership of the cryptocurrency rather than just speculating on its price movements. 

In crypto, perpetual futures contracts are linear contracts with no expiration date. Like standard futures contracts in crypto, they allow traders to take a long or short position on the price of a cryptocurrency and profit from price changes without owning the underlying asset physically. However, unlike traditional futures, perpetual futures have no expiration date. 

Trading perpetual futures have two main advantages over traditional futures contracts:

For instance, the funding rates are regular payments (every 8 hours for Bybit products) provided to or by long or short traders, depending on the difference between perpetual contract markets and spot prices.

The perpetual futures funding mechanism incentivizes traders to buy futures when the price is low relative to the underlying spot market. By contrast, high funding rates incentivize traders to sell futures — this works by creating a risk-free arbitrage if the futures price deviates too far from the underlying.

For example, if the BTC funding rate is positive (longs pay to shorts), in theory, you could sell futures contracts in BTC and buy an equivalent amount of BTC in the spot market to hedge your position, at the same time collecting the funding fees. This arbitrage window ensures the futures price remains anchored to the underlying asset.

 allow traders to use BTC and other coins as the base currency. Since different coins can be used as collateral and the payoff, margin and P&L are calculated differently from linear perpetual futures.

Futures contracts are usually settled in one of two ways:

Note: Bybit's Perpetual Futures Contracts are cash-settled in USDT or USDC.

, like crypto futures, are financial contracts tied to the value of any underlying digital asset that gives traders an option to buy or sell the asset at a set price on a future date. However, unlike crypto futures, options contract holders have the right but are not obligated, to buy or sell the underlying asset at maturity. 

Crypto options contracts offer holders a way to reduce the risk of loss and avoid forced liquidations associated with futures contracts. For this feature, buyers must pay the option's writer a non-refundable initial fee or premium.

While various types of options contracts are available in the crypto market, the two common types are call and put options.

 (Calls) allow the trader to buy an underlying asset at a predetermined date and price (strike price). On the contrary, 

 (Puts) benefit the buyers if the price of the underlying assets falls. Both puts and calls have a specified price (strike price) at which the holder may activate the option either before or at the contract's predetermined expiration date.

The option buyer pays a fee known as an "option premium" to the seller. The premium represents the maximum potential loss for the buyer. Whereas for the seller, the premium is the maximum potential profit.

Say, as an experienced trader, you're convinced the price of BTC will be on the uptrend and buy a call option with a strike price of $50,000. If the price of BTC goes up and reaches $60,000, you can exercise the option to buy BTC at $50,000 and then sell it at $60,000 for a profit. 

Conversely, if BTC price plunges to $30,000 at the call option maturity, you can decide not to exercise your options right. But you'll have to forgo the premium.

In contrast, a put option allows the buyer to sell the asset at a predetermined price before the contract expiration.

Fearing a market downturn, you buy a put option on ETH, with a strike price of $3,000 as a 

. If the price of ETH drops to $2,000, you can exercise your option to sell ETH at $3,000 to cut your losses.

Here are the steps needed to execute the above trade using Bybit’s USDC-settled BTC-Options.

Deselect the expiration dates you don’t want to view. Or you can choose to display several expiration dates at the same time

Next to the expiration dates, select the number of available strike prices you wish to view from the drop-down list.

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Futures vs. Options: Which One Suits You Best?

With a capped downside risk, the bear put spread is an excellent strategy you can use to profit when the market moves down. Here's how it works.

In options trading, a bear put spread is also known as a "debit put spread" or a "long put spread." The "bear" in the strategy's name refers to bearish sentiment — betting on the downside of the market. "Put spread" means buying and selling put options with different strike prices, but the same expiration date.

Typically, a bear put spread is used when a trader is expecting the price of an asset to decline. To set up a bear put spread, the trader buys a

 while selling a further out-of-the-money (OTM) put option of the same size with the same expiration date. This allows the trader to reduce the overall cost involved (more on this in the sections below).

Here's how the bear put spread is set up:

A bear put spread is designed to help traders profit from assets moving down. It is cheaper than only buying a put option.

A bear put spread is to bet on prices of the underlying security going down, but what if you're unsure and you prefer to bet on prices not going up? You can consider doing a bear call spread, AKA, short call spread.

A bear call spread is a neutral to mildly bearish strategy that involves selling a call option while simultaneously buying a call option of a higher strike price on the same underlying asset with the same size and expiry date. This way even if the price goes sideways, you receive profits which is the difference between the premium you receive for selling a call option and the premium you paid for buying the call option further out.

 = Difference between strike prices of calls (i.e. strike price of long call less strike price of short call) – Net Premium. Occurs when the option expires above the strike of the call options.

A bull put spread strategy is a neutral to mildly bullish strategy that involves selling a put option while simultaneously buying a put option of a lower strike price on the same underlying asset with the same size and expiry date. This way even if the price goes sideways, you receive profits which is the difference between the premium you receive for selling a put option and the premium you paid for buying the put option further out, and you receive the maximum gain if the options expire worthless.

 = Difference between strike prices of calls (i.e. strike price of long call less strike price of short call) – Net Premium. Occurs when the option expires below the strike of the put options.

Compared to a long put option, the bear put spread reduces the maximum loss that may be incurred, making it potentially less risky for traders. However, it also limits the maximum amount of profit that can be earned. 

To maximize gains from their trades, a trader will need significant technical knowledge to know which strike prices to sell the put options at. Therefore, this strategy is best suited for intermediate and advanced traders.

As its name suggests, a bear put spread is used when a trader believes that the price of an asset will be 

The ideal scenario is when a trader believes that the price of the asset is going to go down in the near term — but won’t go below a certain key support level,which can be ascertained from strong 

In terms of choosing the expiration date or date-to-expiration (DTE), we recommend that you choose a date 30 days longer than you expect to be in the trade (due to 

). For example, if you think the price of Bitcoin will drop within 15 days, or that you’ll be in the trade for 15 days, it’s best to select a DTE close to 15 days + 30 days = 45 days.

Below, we'll walk you through the process of setting up a bear put spread on Bybit.

Pick the desired expiration date, or show all the expiration dates at once, and then pick one.

Review the details of the options and select the ones you want to buy and sell, either by price or action (buy or sell).

 for each buy and sell order to reveal a confirmation tab.

Ensure that the information entered is correct, and click on 

Now that you know how to set up a bear put spread, let's explore a few hypothetical scenarios.

If the price of Bitcoin closes at $18,500 upon expiry, the trader will break even as $20,000 (long put strike) - $18,500 (current price at expiry) - $1,500 (net premium paid) = $0.

Breakeven Point: Long Put Strike Price - Net Premium Paid = Breakeven Point

If the price of Bitcoin closes at the sell put strike price, this is the sweet spot.

Sweet Spot Profit: Long Put Strike Price - Short Put Strike Price - Net Premium Paid

If you enter this bear put spread trade believing that the asset price will go down but it goes up instead, you will start losing money. Here are two ways you can repair the trade.

then you can sell additional puts to cover the net premium paid.

2. Sell a Call Option or a Bull Call Spread

To reduce your risk, you can consider buying further OTM call options to hedge, essentially selling a bull call spread. However, doing this means you’ll need to sell more call options if you want to break even on your bear put spread.

The maximum take-profit potential is unlocked when the price of an asset drops rapidly toward the short put strike price, 

immediately after a trader sets up the bear put spread

. The price drop increases the value of the put option, while having it happen immediately means that the time value remains high. It’s recommended that the trader take some (or all) profits to capitalize on the gains on the bear put spread if the time value, or Theta, is still high. With each passing day, the setup loses money due to Theta decay (also known as time premium).

One important thing to note here is that this time value decay happens more rapidly in the last 30 days of a contract. Therefore, a trader could be correct on the direction of the trade, but the option trade could still lose too much time value. In this case, the trader would end up with a loss. Therefore, it’s always recommended you have both a mental take-profit and stop-loss percentage amount before entering a trade.

Maximum Profit Potential = Long Put Strike Price − Short Put Strike Price

Maximum Profit at Expiration = Long Put Strike Price − Short Put Strike Price − Net Premium Paid

The formula for your potential maximum loss is simply the net premium paid.

Maximum Loss = Cost of Buying Put − Earnings of Selling Put = Net Premium Paid

 is trading for around $20,000. If a trader thinks that Bitcoin is going to decline further in price within 20 days, the trader can set up a bear put spread by purchasing a

 contract with a strike price of $20,000 expiring in around 50 days, for a cost of $2,100.

Let’s say that the trader also thinks that Bitcoin won’t drop below $16,000. In the worst-case scenario, the 300-week moving average Bitcoin has in place will be triggered (this acted as support during the COVID-19 market crash in March 2020). As such, the trader is willing to sell a put option with a strike of $16,000 and earn $600, in order to subsidize the cost of buying the put option. This results in a bear put spread.

In this case, the trader will need to pay a total of $1,500 to set up this strategy ($2,100 – $600), instead of spending $2,100 if the trader only bought put options.

Now, let's explore a few possible resulting scenarios.

If the price of Bitcoin closes above $20,000 upon expiration, the trader will lose the net premium paid of $1,500.

If Bitcoin lands between $18,500 and $16,000 (such as $17,500 upon expiration), the trader will earn a profit of $20,000 (long put strike) − $17,500 (current price at expiration) − $1,500 (net premium paid) = $1,000.

Sweet Spot/Max. Profit at Expiration Scenario: 

Bitcoin drops to $16,000 on expiration. The trader will earn a profit of $20,000 (long put strike) − $16,000 (short put strike) − $1,500 (net premium paid) = $2,500.

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