The cryptocurrency industry is going through another phase of rapid development amid the current bull run. Derivative trading instruments for digital assets are becoming increasingly popular among the investors. One of the instruments referred to as Options — are contracts that are not yet so widespread among crypto enthusiasts. Thanks to the simplicity and convenience of the Option Bot by 3Commas, the entry threshold into Options trading has become much lower! Today we are going to break down the main elements of the bot’s interface and introduce the most common and profitable strategies.
What is an Option?
An Option is a derivative financial instrument based on an asset (cryptocurrency) that allows its buyer or seller to reduce risks and profit from volatility. The term “Option” refers to a contract that gives one party the right (but not the obligation) to buy or sell an asset at a predetermined price (strike) before or at the time of the expiration, subject to the payment of a premium. We have already covered Options and Options trading strategies in a recent blog post which you can access here.
Let’s take a look at a practical example. Imagine that a trader expects the price of Bitcoin to go up to $70,000 before the Option’s expiration date, while at the moment it is possible to buy BTC for $65,000. The trader finds an offer to buy an Option with a strike price of $68,000 and a premium of $1,000. They buy an Option by only paying the premium. Closer to the expiration date the market value of BTC rises to $70,000 and the trader decides to purchase the asset under the contract. That is, they buy it for $68,000 and can immediately sell it on the market for $75,000. The net profit on the trade then equals the difference between the market price and the sum of the strike price and the premium.
There are two types of Options:
- Call Option (Call) — a contract that allows its buyer to buy an asset at a fixed price;
- Put Option (Put) — a contract that allows its buyer to sell an asset at a fixed price.
These are the simplest ways to trade Options. There are numerous complex strategies and in some cases the trader needs to purchase several such derivatives at once. Keeping track of all of the trades is quite difficult, and this is where the 3Commas Option Bot can help.
Why use an Option Bot?
The bot helps execute complex Option strategies and visualize the whole process. In other words, all the user needs to do is choose a strategy, the desired range when opening a trade, expiration time and the trade’s volume. The bot will display a chart that will provide a clearer picture of the potential profit and possible loss from the asset price movement.
As an example, let’s take a look at an Option consisting of 8 contracts based on the Long Butterfly strategy. It will be profitable if the price of the asset continues to move in the expected channel until the expiration date. In this case, we expect that the price of ETH will stay between $1,680 and $1,920. The bot purchases 2 Put Options with a strike price at the bottom of the channel and 2 Put Options with a strike price at the top of the channel. It also sells 4 Put Options with a strike price at the middle of the channel.
The bot generates a Profit & Loss chart on the trade for each price movement scenario. The graph takes the shape of a triangle, where the top indicates the maximum profit (if ETH price stays exactly in the middle of the channel). Why so?
Here’s how this works:
- Options at the lower border of the channel make a profit because the trader can immediately sell it at the market price (higher than the strike price);
- The trader may choose not to execute the Options with a strike price at the top border, and lose the corresponding premium. It is not profitable to execute the contract, because the market price is lower than the strike price;
- Options with a strike price in the middle of the channel will bring profits;
At a first glance, Options trading can seem complicated to a beginner, but the 3Commas Option Bot does most of the calculations for you. All you need to do is understand the fundamental nature of the contracts, while the bot will help you select the appropriate trade according to preferred parameters.
What makes Options better than Futures?
Futures is a contract with a commitment to buy or sell a certain amount of cryptocurrency at a specific price before the contract expires. Cryptocurrency futures appeared on the Chicago Board Options Exchange (CBOE) and the Chicago Mercantile Exchange (CME) in late 2017. However, the vast majority of traders and investors use futures on such platforms as BitMEX, Binance, OKEx, FTX and the likes. The most common type of futures on such platforms are open-ended contracts — a special type of futures that don’t have an expiration date.
Open-ended contracts trading is based on the digital asset’s underlying index, meaning that there is little difference between the price on the futures and the cryptocurrency market price. The main reason for the popularity of futures on various exchanges is the ability to use leveraged funds for trading.
Cryptocurrencies are highly volatile assets that can dramatically change in value in a matter of days. Futures trading (and even more so, leveraged trading) involves significant risk and the threat of liquidation. In addition, futures trading can be unprofitable when a cryptocurrency price moves in a horizontal channel.
Options trading can be much more profitable when compared to Futures trading, and with the proper use of strategies, Options also provide the opportunity to make earnings even in the absence of a distinguished trend. The example on the screenshot below presents the Long Butterfly strategy, designed to profit from price staying within the channel until the expiration date.
Options can be used in conjunction with other trading tools, including futures. They can also help reduce risk if the market suddenly changes the trend or starts moving sideways.
Utilizing the 3Commas Option Bot
Let’s review the main elements of the bot’s interface:
- Trading Account (Deribit exchange is available) and cryptocurrency (BTC and ETH are available) selection fields;
- Expiration Date selection field;
- Strategy settings panel (simple or advanced). We will take a closer look at the elements of this panel later on;
- Expected Volatility and Expected Trend (simple strategy). The Expected Volatility parameter allows you to select the “width” of the channel, affecting the range of profitability or loss. The Expected Trend parameter allows to move the setup left or right shifting it in the direction of the expected price movement and also in search of liquidity;
- Maximum tolerable Loss
In the Advanced menu, you can manually edit the buy and sell levels according to the chosen strategy.
If the expected volatility changes, the next points on the chart will be placed further apart; this way you can manage the risks relative to the asset’s volatility. Changing the expected trend’s parameter will allow you to move the setup searching for a suitable opportunity to execute the Option.
Let’s create our first trade. Say, you believe that the price of Ethereum will go up to the selected futures expiration date and choose the Long Call strategy. The bot will automatically offer to buy 1 Call Option and generate a profitability chart. You will profit if the ETH price reaches the green zone on the chart by the expiration date.
An example of the opposite trade is buying a single ETH Put Option. In this case, you will benefit from the price drop, because you can sell the asset above the market price at the moment of expiration.
Another useful strategy is called Long Strangle. It allows you to earn from the price moving outside the channel; it does not matter whether it is an uptrend or a downtrend. The bot displays two green zones outside the horizontal channel defined by the trader. This pattern consists of one Put Option and one Call Option. The logic is simple: if the price stays outside the channel’s boundaries, the trader can profit from either one of the contracts and only lose a premium for the other.
The last example (mentioned above) is the Long Butterfly strategy. In this case, one can profit if the asset’s price moves horizontally, that is, when there is no clear trend. Long Butterfly strategy can be a great way to hedge against the risks if the trader expects the price to rise or fall.
Keep in mind the expiration time when buying Options — the more time until expiration, the harder it is to predict the behavior of the market. It also affects the cost of creating a contract and how hard it is to find a suitable contract. If you have not been able to implement a strategy on a preferred date due to lack of profitable contracts, you can try another date, and so on.
Option Bot is a great tool for automating Options trading for those who already understand the basics of such contracts. Thanks to our bot, you can avoid a lot of unnecessary pitfalls, better understand nuances and transact in a more convenient way.