We held an AMA of "How and Why to Trade TON Options" at Twitter Space last week with Paul Braverman, Quantitative Analyst at Darley Technologies, KD Cheung, Director of Sales and Business Development at BIT and Toya Zhang, CMO at BIT.
Here is a warp-up for your quick reading.
First, let’s recap what options are.
1) Options are an advanced trading tool where you can use to hedge dynamically the positions you have, speculate on the market direction and manage risks.
2) Crypto options are a type of financial derivatives, whose value is derived from other underlying crypto assets.
3) An option is an agreement between two parties that gives the buyer of the option the right, but not the obligation, to trade an underlying asset at an agreed price on an agreed date.
4) A call option is a contract that gives the option buyer the right, but not the obligation to buy the crypto asset; A put option is a contract that gives the option buyer the right, but not the obligation, to sell the crypto asset.
Q1) How is options trading different from futures trading?
Futures are linear derivatives where the price movement in the underlying asset translates directly into a specific dollar value per contract.
Options are non-linear derivatives in which the payoff changes with time and space.
Therefore, options can be used to dynamically hedge against linear instruments.
Q2) What types of users are suitable for options trading?
Options is an amazing tool and it doesn’t have to be a sophisticated or institutional investor to trade options.
It applies to people who are interested and doesn’t require deep knowledge, even though it is more complex than spot and futures trading.
Options can be used to express your views towards a certain #token, hedge a position you have, while at the same time keep the loss to just the premium and minimize the risks.
Individual clients are generally sacred about options trading, yet options are very accessible and straightforward.
For example, a call option is like normal spot trading, to speculate whether the market will go up or down. It is making the same judgement, even though it comes with different strategies.
With options trading, not only can I play spot, but also volatility, another dimension to play around. To begin with, you can start with the covered call or protective put strategies.
Q3) What if I do not have any viewpoint towards a certain #token price or the market, but I still want to limit my loss/ gain, what will be the advice?
If you are holding a particular token, use a covered call strategy (sell puts to earn premium) to yield passive income with low risk, even the market is not moving.
If you are not holding the token, sell a call and sell a put within a certain range and when the price goes up to a certain price, then you buy that back.
Q4) TON’s implied volatility is higher than BTC and ETH. What does it mean and what can we do?
It means sell a call in TON will earn more than selling a call in BTC.
Retail clients can get compensated more on the underlying TON’s volatility than in BTC.
If you think TON will be a major and more stable like ETH, you can buy the volatility of BTC and sell the volatility on TON.
There are various ways to get these exposures and bet on the convergence of the volatility.
Q5) As a trader, what tools do you use to visualize all your positions and exit points?
Implied Volatility Surface with options dashboard across strikes and volatilities.
Q6) Do users need to hold TON to trade TON options on BIT?
The short answer is no.
BIT has the unified margin mode, where users can trade spot, perpetuals and options all in the same account; And the margin currency is USD, meaning everything is calculated back in USD. Users do not have to transfer the funds back and forth between multiple accounts. Therefore, users do not need to own TON to trade TON options.
If you take one step further, you can take a view on TON but not having any underlying exposure to it. That is a wonderful thing in the world of altcoins, as you no longer have to take double risks.
The overall risk is calculated in USD and this improves the capital utilization.
Q7) What options strategy TON holders should use?
If you think TON will increase in value, you might go long in futures or buy at spot.
With options, you can buy calls at the money and sell a call out of the money, making the long position cheaper in entry price.
If you think the TON’s piece will stay the same or decrease, sell puts and get paid for premium.
With options, you can layer with different strategies.
I do not risk the downside with call options, and I get a chance to earn. At most I just risk my premium.
Q8) Volatility moves up and down. How to trade on volatility?
Let’s talk about the basics of implied volatility (IV) first.
IV is one of the big components in the price in options. IV is implied volatility, meaning how much the price of the underlying asset might fluctuate in the future. High IV expects a higher degree of price volatility.
As for an option, it has intrinsic value and extrinsic value.
For example, an iPhone costs $1000 but I just want to buy at $500. There is an intrinsic difference in value between the market value and the value I want to pay. And I think you will not sell the iPhone to me at $500.
There is also extrinsic time value, the time value that how long the contract will expire.
If I wanna buy the iPhone at $500 only 2 years from now. The seller might reconsider as it might be a good deal. If I change to 2-week expiry instead of 2-year expiry, the chance of an iPhone value to drop is not so high anymore. So the holder would not sell at $500.
This demonstrates the importance of time value in the pricing of an option. More time means more chances for something to happen. This is what IV is trying to measure.
If IV is high, it means there are chances of something to happen will be higher, so the cost of an option will be higher. And you are a seller, you can sell a straddle, sell a put, sell a call, sell a put spread with a higher price; and you want to buy, it is when the IV is low.
Miners will use protective puts strategy to protect their asset holdings. If you think of BTC and ETH as our fit 20, 30-year-old, buying insurance for them is not a problem. If you buy the altcoin TON at 75 years old, buying insurance for them is a problem. Nobody wants to insure them.
Why TON options are attractive. Previously you can only trade TON at a linear mode, now it is a way to insure it. With options offering on BIT, you can buy insurance for your father at 75 years, insurance for TON with large holdings. For those who do not have exposure to TON, you can also take a view on it without owning it.
The basic strategy is, if I think the volatility is going up, I can buy at the money straddles, in which I buy a call and buy a put at the money, and I catch it later at different strikes. I do not actually get much on the directional exposure, but all my options have increasing value.
If I think the volatility is going down, I will take the opposite strategy, selling the straddles. Institutional clients use the straddle strategy to delta hedge TON to some extent. Make sure you are getting the volatility exposure but not the directional exposure. Options offer 2 dimensions of the trades.
Q9) What does it mean to the crypto market with more altcoin options added?
It is a natural progression like the traditional markets, where users can take view on different assets. And with more altcoin options, people are taking more active interest in altcoins than just BTC and ETH. Options allow you to get the exact exposure you want when it comes to altcoins.
Most of the new products coming out in crypto, they are taking from the check 5 playbook. Traders always look for edge, how and where do they make more. So it started from spot, then futures, futures with higher leverage, perps and now move to options. It is a progression with more products which are inevitable but its also welcome. The maturity of the industry means greater participation. And this is a good thing for all of us.
Q10) Why do you list TON options?
BIT has built a close partnership with TON, DWF Labs and Darley Technologies and will have a deeper integration with TON. It will be revealed later.
Q11) Why do you list altcoin options?
We are expecting the crypto financial market to go mainstream. Adding derivatives on top is to stabilize the whole financial infrastructure and it is inevitable as the financial ecosystem progresses. It is not just TON, but also other altcoins to play a key role in the market.