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Bybit Learn
Intermediate
22 Th06 2022

ETH Options: How to Own Ethereum Without Actually Buying It

Global interest in cryptocurrency, whether Bitcoin, Ether or various altcoins, has soared over the past few years. Crypto is currently a hot topic of conversation on various social media platforms, including TikTok, Twitter and YouTube. Statistics show that 31% of people aged 18 to 29 and 21% of people aged 30 to 49 have dabbled in cryptocurrencies. The global cryptocurrency market cap currently stands at $880 million, and it isn't just the assets that are gaining popularity.

At present, a number of crypto derivatives and futures are available for trading in the crypto markets. Crypto options are a kind of derivative — a financial instrument that can be used to hedge or research and speculate on an asset's value.

More specifically, a crypto option provides the buyer the right (without any obligation) to purchase or sell the underlying cryptocurrency for a set price at (or before) a fixed expiration date. The right to buy the underlying cryptocurrency is referred to as a “call” while the right to sell is called a “put.”

Ethereum: A Short History

In 2013, Vitalik Buterin, the co-founder of Ethereum, released a white paper detailing the blockchain's operations, including its mechanics, applications and potential areas for concern. Two years later, Buterin and Joe Lubin, the founder of blockchain software startup ConsenSys, jointly launched the Ethereum platform.

Ethereum's founders aimed to build an electronic, programmable network with use cases beyond enabling the safe trade of virtual currency. In 2016, a group of Ethereum network participants obtained majority control of its blockchain. In June of that year, a hacker took the opportunity to steal over $50 million worth of Ether raised for a project. [While the hacker’s identity remains unproven, various sources point to TenX CEO Toby Hoenisch, who denies the claims.]

To restore the stolen funds, Ethereum members voted on a hard fork, and Ethereum Classic (ETC) was born. A small proportion of the community, however, decided to remain on the original Ethereum blockchain.

Since its launch, Ethereum has climbed to the #2 spot of CoinMarketCap’s cryptocurrency rankings, and has managed to retain its position ever since. As of June 22, 2022, it has a market capitalization of approximately $136 billion.

Are There Options on Ethereum?

You can now trade ETH options from various crypto exchanges. Crypto options such as ETH options are popular because they allow plenty of room for leverage. Instead of paying $1,150 to buy 1 ETH, you can spend a much lower amount of money on ETH options, and technically own a larger amount of Ethereum by doing so.

Broadly, ETH options can be classified into two categories: Call options (bullish bets) and put options (bearish). While call options are used to buy assets, put options are used to sell assets.

Styles of ETH Options

European: A type of option that allows the trader to only exercise the contract at the time of its expiration.

American: With American options, buyers can exercise their contracts at any time before they expire. Because American alternatives provide more flexibility, they’re usually more expensive than European or Bermuda-style options.

Bermuda: A restricted type of American option, Bermuda has two deadlines on which the options might be exercised — the expiration date, and specific dates before expiry.

Cryptocurrency traders can buy options for exposure to capital appreciation, or they can sell them to earn a premium. Both put and call options can be purchased and sold. It's important to note, however, that neither choice is risk-free.

ETH Options vs. Ethereum

Ethereum

Ethereum is based on a blockchain network — a decentralized, distributed public ledger that verifies and records all transactions. In blockchain transactions, cryptography is employed to keep the network secure and validate transactions.

With the help of computers, users can "mine" ETH by solving complex algebraic calculations. In this way, validated transactions are executed on the blockchain network and add new blocks. Traders are given cryptocurrency tokens as a reward, and these tokens in the Ethereum platforms are termed Ether, or ETH.

The Ethereum network may be used to store data and run decentralized apps (DApps). Users can even host software on the Ethereum blockchain.

ETH Options

In trading, an option is an agreement that grants its holder authority (without obligation) to purchase and sell an asset on an agreed-upon date at a set price.

There are two main types of ETH options:

Call Option (Bullish)

A call option provides holders with the right to buy a specific amount of Ether on a specific date, at a predetermined price.

Put Option (Bearish)

A put option provides holders with the right to sell a specific amount of Ether on a particular date, at a specific price.

The main factors that determine an option’s price are:

  1. The underlying asset’s price

  2. The time premium

  3. The strike price

  4. The implied volatility

The price of a call option increases with an increase in the price of the underlying asset. Conversely, the price of a put option decreases with an increase in the price of the underlying asset.

Buying ETH Options

The principal trading venues for buying ETH options are centralized exchanges, such as FTX or KuCoin. Some exchanges settle crypto options contracts in cash, whereas others physically distribute crypto assets to investors after a trade is completed. Factors such as platform costs, asset liquidity and personal trading strategy should be assessed before choosing a venue for trading.

Recently, noncustodial options trading systems on Ethereum have been gaining traction. While not very liquid, options platforms are compatible with Ethereum's decentralized finance (DeFi) stack. The majority of permissionless options trading systems are modeled after standard options protocols.

Crypto options can serve as an affordable, low-risk alternative to perpetual swaps or futures. Like other derivatives, options contracts allow traders to bet on the future price of an underlying asset. They can be settled in cash (U.S. dollars) or cryptocurrencies (Bitcoin, Ether, etc.).

Strike Price

The target price of each option is known as the “strike price,” which determines whether an option can be exercised. The value of an option is dependent on the difference in price between the strike price and that of the underlying asset.

The strike price of call options is the price at which the option holder can purchase the assets. On the other hand, the strike price of put options is the price at which the assets can be sold. Strike prices are standardized, which means they are set in predetermined monetary amounts.

Expiration Date

The “expiration date” for an Ethereum option means the deadline for exercising option contracts. An option expiring "in the money" provides the owner of the option the choice to exercise it, or to close the position to collect the profit. If an option is "out of the money" on the day it expires, it loses all value. If you don't intend to exercise your option, you can exit your contract before it expires and either profit or lose money.

In the Money (ATM)

This occurs when the strike cost of an option is more favorable than the market price of the underlying asset. An in-the-money (ITM) call option relates to the ability of the option holder to purchase an asset at a cost lower than the market rate. With an ITM put option, the option holder can sell the asset at a price higher than the current market price.

Out of the Money (OTM)

The strike price of an out-of-the-money (OTM) call option is greater than the market worth of the underlying asset, while an OTM put option has a strike rate that is lower than the underlying asset's market rate.

Traders can still benefit from buying OTM. One possible scenario is that they’ve purchased a less expensive OTM option, but that option is now getting closer to becoming ITM. As such, even though the option is currently OTM, it may become worth more than the trader paid for it.

At the Money (ATM)

In this case, the price of the underlying asset is equal to the strike price of the option.

Are ETH Options a Good Investment?

Many factors come into play when determining the value of Ether or ETH options. Pricing is influenced by several variables, all of which should be taken into consideration before you enter a contract.

ETH options allow users to hedge against risk and improve market equilibrium by providing opportunities for arbitrage. They’re cost-effective since they don’t demand an upfront charge when issuing a contract. Another advantage is that you don't have to exercise the contract if you don't want to — you can choose to opt out of the contract. Options also boost the liquidity of the market.

The market for ETH options is quite volatile. As with other asset classes, traders have a better chance of making a profit if the market moves in their favor.

Conclusion

For buyers, the key advantage of making informed options investment decisions is that they’re under no obligation to exercise a contract if they don’t want to. Crypto options carry a risk that’s limited to the premium paid. If the market goes against an options buyer, the resulting exposure won’t lose more than their initial investment.

If you're looking to diversify your portfolio with options, ETH options may be a good entry point. Alternatively, you can trade another type of crypto option, Bitcoin options, with Bybit.