Crypto Options Trading Strategy: Using Options to Protect Your PnL

If you’ve always been curious about how to trade crypto options, you’ve come to the right place. This is a series on crypto options trading where we share some basics as well as several ready-made strategies that you can implement today. 

Whether you’re a new crypto trader, an existing perps trader, or even an advanced options trader – we hope you find this series useful. 

Part 1: What are Options: A beginner’s guide to crypto options 

Part 2: How to Hedge Your PnL Gains: Using crypto options to hedge your perpetual contract positions

Part 3: How to HODL and Generate Yield: Using crypto options to generate yield while hodling your favourite token while generating yield

Part 4: How to Leverage Market Volatility: Using crypto options to profit during market volatility 

Part 2: How to to Hedge Your PnL Gains

TL;DR. Crypto options can be used to hedge your perpetual contract positions, allowing you to lock in a fixed profit should the market rise or fall, while not limiting your upside gains. 

Why would you want to do this? You want a good night’s sleep. You want to remove the risk of losing your PnL gains should any sudden price spikes/drops for a respective asset occur. 

Let’s Look at an Example

Using a fictional market scenario, let’s look at an example of how this strategy can be done. 

Say you bought one BTC (Bitcoin) via a long perpetual contract at $40,000. 

The current BTC price is $47,000. 

This means you have an open profit of $7,000 on your long position. 

You remain bullish on BTC and have no desire to close the position yet. 

However, you want to remove the risk of losing your profit due to any sudden price drop in BTC – say, below $45,000. 

How Can Options Help?

In this scenario, you can purchase a put option for one BTC with a $45,000 strike price. This will cost a $1,000 premium. 

You select an expiry date of 28/5/2024 based on your market analysis. 

Should the price of BTC drop (e.g. below $45,000), the put option protects you from the market action. 

Should the price of BTC continue rising (e.g. above $47,000), your long perpetual position will continue giving you profit. 

The only expense incurred in this scenario is the $1,000 premium paid for your downside protection.

Once the expiry date hits (28/5/2024), your option position will be automatically exercised if it’s profitable. You’ll receive your payout if the spot market price of BTC is below $45,000.

So if the BTC price is at $38,000 on the expiry date, then the payout from your $45,000 strike price put option would be $45,000-$38,000= $7,000.

Remember, once your option expires, you are no longer protected against price movements. However, let’s look at the position as a whole: 

  • If settlement is below $45,000, you are now effectively long one BTC via your perpetual contract position at (Settlement Price – $45,000 + $1,000) + $40,000 = Settlement Price – $4,000.
  • If settlement is at $45,000 or above, you are now effectively long one BTC via your perpetual contract position at $41,000.

On BitMEX Options, you’ll receive your payout in USDC so you don’t have to go through any further asset conversions to cash out. 

Ready to start trading crypto options? 

Trade BitMEX Options

Like what you’ve read? We’ve got a range of educational resources on trading crypto options as well as other derivatives, which you can find here.

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