Skip to main content

Options Trading

TL;DR: Options are complex derivatives that give you the right, but not the obligation, to buy or sell an asset. While they are a brilliant tool for hedging risk and trading volatility, their complex pricing mechanics (The Greeks) make them unsuitable for split-second directional scalping.

[!WARNING] A Professional's Tool: Options are designed to help institutions avoid massive financial losses. However, trading them requires deep mathematical knowledge. If you do not understand how implied volatility and time decay work, you will lose money even if you correctly guess the direction of the market. You must study the "Greeks" extensively before executing your first options trade.

While Futures obligate you to buy or sell an asset at a certain price, an Option gives you the right (but not the obligation) to do so. You pay a premium upfront for this right, acting essentially as an insurance policy.

If you buy a Call Option for Bitcoin at $70,000, and BTC goes to $100,000, you have the right to buy it at $70,000 and pocket the difference. If BTC drops to $20,000, you simply let the option expire and only lose the small premium you paid.

The Ancient History of Options​

The concept of an options contract is not a modern Wall Street invention; it dates back to ancient Greece.

Thales and the Olive Presses (6th Century BC)​

As recorded by Aristotle, the philosopher Thales of Miletus executed the first recorded options trade. During the winter, Thales used his knowledge of astronomy to predict that the upcoming olive harvest would be exceptionally bountiful.

Anticipating a massive surge in demand for olive presses, Thales used his limited funds to pay small deposits to the owners of olive presses across the region. This deposit gave him the exclusive right to rent the presses at harvest time for a fixed, low price. Crucially, if the harvest failed, he was not obligated to rent them; he would only lose his small deposit.

When the harvest boomed as he predicted, demand for the presses skyrocketed. Thales subleased his rights to the presses at a massive markup, effectively inventing and profiting from the first "Call Option."

Tulip Mania (1637)​

Options also played a critical role in the aftermath of the Dutch Tulip Mania. At the height of the bubble, speculators traded futures contracts for tulip bulbs that were still dormant underground. When the bubble burst in early 1637 and prices collapsed, buyers faced complete financial ruin because they were legally obligated to buy the now-worthless tulips at hyper-inflated prices.

To prevent systemic economic collapse, local authorities intervened. They decreed that existing futures contracts could be legally treated as options contracts. Buyers were permitted to forfeit a small penalty fee (around 3.5% to 10%) to the seller, allowing them to walk away from the contract without going bankrupt.

Modern Options: American vs. European​

Today, when trading options, you must understand the two distinct geographical "styles" of execution. These names have nothing to do with where you live; they define the mathematical rules of the contract.

American Options​

  • The Rule: You can exercise your option at any time before the expiration date.
  • Where they trade: This style dominates traditional US equity markets (like the options traded on the CBOE for Apple or Tesla).
  • The Catch: Because you have the ultimate flexibility to exercise early, American options usually command a higher upfront premium.

European Options​

  • The Rule: You can only exercise the option exactly at the moment of expiration.
  • Where they trade: The vast majority of the crypto options market—most notably Deribit, which controls over 85% of global crypto options volume—uses strictly European-style options.
  • The Misconception: Beginners assume that because they are "European," they are trapped in the trade until expiration. This is false. While you cannot exercise the right to buy the underlying Bitcoin early, you can sell the options contract itself back to the open market at any time to realize your profit or cut your losses. Furthermore, Deribit options are cash-settled, meaning no physical Bitcoin is ever delivered; you simply receive the profit in cash at expiry.

Why Scalpers Avoid Options​

If options offer defined risk (you can only lose your premium), why don't professional scalpers use them instead of Perpetual Futures?

  1. The Greeks (Complexity): Options pricing is not linear. The price of an option is determined by Delta (price), Theta (time decay), and Vega (implied volatility). If you buy a Call option, the price of Bitcoin might go up, but if Implied Volatility (DVOL) crashes at the same time, your option will actually lose value. A scalper trading Micro-Impulses cannot afford to fight complex mathematical variables; they need pure 1:1 price tracking.
  2. Liquidity and Spread: While Deribit is highly liquid, options liquidity is split across hundreds of different strike prices and expiration dates. This fragments the volume. Compared to the massive, centralized liquidity of a Perpetual Future, Options suffer from wider spreads, making split-second scalping mathematically unviable.

Advanced Options Strategies​

When professionals do trade options, they rarely buy "naked" calls or puts. They construct complex, multi-leg spreads to define risk and farm volatility:

  • Buying/Selling Volatility: Options traders don't just bet on price; they bet on chaos. If DVOL is historically low, they buy options (expecting an expansion). If DVOL is peaking during a panic, they sell options to collect massive premiums, expecting the volatility to crush.
  • Vertical Spreads: Buying and selling options with the same expiration date but different strike prices. This caps your maximum profit but drastically reduces your upfront cost and risk.
  • Calendar Spreads: Buying a long-dated option and selling a short-dated option at the same strike price. This is a bet on time decay (Theta), profiting as the near-term option loses value faster than the long-term one.
  • Diagonal Spreads: A hybrid approach using both different expiration dates and different strike prices. It allows a trader to express a directional bias while simultaneously collecting premium from time decay.

Conclusion: Use Options to construct complex spreads, hedge a long-term Spot portfolio, or trade pure Volatility. But when it is time to execute aggressive, directional scalping, strictly use Perpetual Futures.