Hopefully you’ve now grasped the basics of what a put option is, including how they differ from call options. In this section we will be adding an extra layer to what you’ve learned about put options so far, by moving onto cryptocurrency put options.
We will be looking specifically at the cryptocurrency put options available on Deribit. For the most part these cryptocurrency put options work exactly the same as the put options we’ve covered so far. The buyer of a bitcoin put option for example is purchasing the right to sell bitcoin, just like the put options we covered in section 5.
As we covered in lecture 4.1 though, the options on Deribit use the cryptocurrency itself as collateral, not dollars as in the previous section. This means that your account balance will be in bitcoin for example, rather than US dollars. Any profits or losses will also be paid and received in bitcoin.
This leads to an interesting difference in the profit/loss calculations of an option when calculated in bitcoin. The payoffs now have a curve to them rather than the previous linear payoffs. Hopefully you began to understand what this means throughout section 4, but don’t worry if you need some more help with this, as we will explain how it works in this section as well, including some live examples.
Using the cryptocurrency itself as collateral also leads to a difference in the breakeven point and maximum profit/loss calculations. It’s important to be aware of these differences, particularly when making the jump over to cryptocurrency options from options in traditional markets. This difference is even more important to be aware of with cryptocurrency put options, because when selling a cryptocurrency put option the maximum loss when measured in the cryptocurrency itself, is unlimited. This is a significant difference to the dollar put options discussed in the previous section, which had a maximum loss capped by the strike price minus the premium.
These differences we’re going to work through in section 6, are not specific to bitcoin, or even cryptocurrency. They arise simply because we are using the underlying asset itself as the collateral, and any profit/loss is also paid in this same asset. The same formulas would apply if we were using Facebook shares as collateral for trading Facebook options, or Amazon shares as collateral for trading Amazon options.
Base currency and quote currency
Just like with the cryptocurrency call options discussed in section 4, with the cryptocurrency put options on Deribit that we will be covering in section 6, we are using the base currency for collateral and payments, rather than the quote currency. The profits are still calculated in the quote currency (USD), but they are paid in the base currency (BTC).
You can think of any tradable currency or asset pair as the price of the base currency, quoted as an amount of the quote currency. Or put another way, how many of the quote currency it takes to purchase one of the base currency. In the example shown here, how many dollars it takes to purchase one bitcoin.
In section 6 we will first work through each of the differences that arise due to this, showing you how to make the calculations precisely yourself. For the put options, pay particular attention to the difference in the maximum profit/loss calculations as this is a common sticking point for traders new to cryptocurrency options. We will then move on to some live trade examples so you can see exactly how to place trades on cryptocurrency put options.