Part Two: Translating the Options Chain

July 28, 2020
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Get ready to get your hands dirty today. We’re about to learn the language of options.

But first… For those of you just joining us, I’d first like to say welcome! You are making a great decision by following us. Our team at Jarvis Labs tracks the market movers of crypto to front run them at their own game. We let our artificial intelligence and machine learning trading system, Jarvis, guide us. It combs through transactions in real time to uncover price changes before they happen in the market.

A trading method that leverages Jarvis is options. We’ve been using Jarvis for options for much of this year and are getting ready to make this product available for everyone. In anticipation of the release we are rolling out an educational series on options. After all, even if you aren’t interested in using Jarvis, options in crypto are growing by the day. In order to capitalize on this, it’s important to gain an understanding of how to use them.

Now, to get up to speed on our options series, be sure to check out our previous write up. It’s titled Intro to Options and serves as the foundation for the rest of our course. We will be drawing references to the intro article throughout.

Now, without further ado… Let’s dive in!

The Trade Idea

The options chain can be incredibly intimidating. There are dates, greek letters, percentages, bid/ask, and a slew of other columns to dissect. The first time I laid eyes on an options chain I immediately navigated away from it. That was a mistake. If I had taken fifteen minutes I would have most likely traded my first option that day.

For me, what I wish I had was somebody to walk me through placing a trade based upon a trade idea I had. So today, let’s do that together. Keep in mind, this is not trading advice nor a trade recommendation. This is simply for illustrative purposes…

To start, what does a trade idea look like for bitcoin?

Let’s use a trade idea we see most popular in the market right now: BTC will break up and out of its current trading range ($9,000-$10,500) sometime before the end of August 2020. (Again, this is not a trade we endorse, we are just using it as an example.)

It’s a valid idea. The question is, how do we ‘play’ it?

Sure, we can buy bitcoin and sell it in August. But that’s not much of a return on our investment.

We can use leverage to increase our upside via perpetual futures, but that means we need to pay interest on our position… Or run the risk of getting liquidated over the course of several weeks.

It’s where buying (or going long) options can be incredibly valuable. They give a buyer massive upside and a predetermined amount of risk. Or said differently, risk a little in order to make a lot. Pretty nice right?
Going back to our trading idea… We see right away the timeline is August 2020 and our price projection is above $10,500 per bitcoin.

With options this means we want an expiration in August 2020.

In the picture below is a screenshot of Deribit. On the left hand side of their website is the various expiration dates for options.

(Note: Deribit is the options exchange with the most liquidity in the market. And in our opinion Deribit isn’t just a first mover in the options market, it is the options market. We will reference their website often for this reason.)

We can see two expiration dates happening in August. August 7th and August 28th. A more conservative approach would consider the later date, a more aggressive trade idea will consider the earlier date. For this exercise we will take a look at the August 28th options chain for bitcoin.

Here’s a quick glance of what BTC-28AUG20 Options looked like when the snapshot was taken on July 23, 2020:

A bit overwhelming, right? Not to worry, I’ll walk you through how to implement the trade idea…

On the left half of the screen are call options, the right half are put options. Since we believe price will go up, much like the olive presses did in our Intro to Options example, we are wanting to buy a ‘call’.
If we thought the price of bitcoin would go down, we would consider a put.

The calls on the left hand side of the options chain have a bunch of columns and rows. For our trade idea, we want to focus on that price target we mentioned earlier. The $10,500 target.

In order to find it, look at the center column titled “strike”. You’ll see the $10,500 strike price about two-thirds of the way down.

Remember, the strike is what Thales paid the olive press owner when he exercised his option. Meaning Thales needed to fetch a price above the predetermined ‘strike price’ for his option to hold any value. In our example here, bitcoin needs to trade above $10,500 for the option to hold value.

Now, the last piece to consider is how much does the option cost? That’s the deposit Thales put down to reserve his right to the olive press during the harvest. In options it’s called the premium. And the premium is found in the bid and ask columns.

In our example, we can buy a call option for August 28, 2020 at a $10,500 strike for $311.53. That’s the lowest asking price for that options contract.

But is it really what we want? The premium is $311.53. If we exercise our option it’ll cost us $10,500. So for us to be in profit, price needs to be above $10,811.53 per bitcoin.

We originally said the price will be higher than $10,500, not $10,811. Meaning this might not be what we originally had in mind. It’s an important consideration since many new option traders make this mistake. They fail to consider how the premium might impact their trade idea. In saying that, maybe the lower strike price is what we are really wanting?

Here’s the lower strike price…

The lowest ask is $455.31. Which means bitcoin needs to trade above $10,455.31 on August 28, 2020 for our option to be in profit. And since we think it’ll be above $10,500 this option seems to fit with our trading idea.

If you were to go ahead and buy this call option, here’s what the option will look like:

Let’s go ahead and break this option ticker down…

BTC: The asset, bitcoin.
28AUG20: The expiration, August 28, 2020.
10000: The strike price, $10,000.
C: The type of option, “C” is a call while “P” is a put.

What’s important to note is on Deribit you can purchase fractions of a contract. You don’t need to buy an entire contract for $455.31. You can buy 0.1 contracts for $45.53 if you want. The key is to understand how options can play a part in your portfolio… A topic for a later date.

Now, you just bought a call option on bitcoin. You can see it in your positions tab. Now what?

Do I Just Wait?
Many new traders wonder what happens next. Do I just wait until the expiration date arrives? Or can I act on the trade early? What if I don’t want to exercise the option and fork over $10,000?
This is where selling the option back into the market comes in handy. If price were to suddenly surge over $11,000, you can sell the option back into the market and collect the higher premium.

In this sense, you are merely selling the right to the bitcoin… The bitcoin that some option writer originally sold into the market.

Another common question is, what happens if the price is below $10,000 when the expiration date arrives?

This question hits on risk. When you buy an option you pay a premium. This premium can become $0 if the price is below $10,000 when the expiration date arrives. This is not an optimal outcome. But, that’s all you lose. You lose the $455.31 you spent to buy the right and nothing else. That’s what I mean by having your risk defined.

If the contract is worthless there is no liquidation of your account. The amount at risk when buying an options contract is the premium paid.

Now you might be asking yourself… But losing $455.31 is a lot. Is the upside really that high to make it worth it? And this is where I say, tune in next time because that touches on the topic of the next article… What factors influence price.

And to help grab your attention, as we go to publishing on July 27, here is how our two low risk option strategies are playing out as bitcoin pushes $10,800…

Not too bad. Note, our firm partially closed our position to make this a risk free trade and let it ride.

In later sections we will get into how you can employ simple strategies like the straddle / strangle in the screenshot above to make consistent, low risk, returns in your portfolio.

But let’s first learn to walk before we run!

Until next time, we’re on the scent…

B Lilly

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P.S. — Did you find this article helpful? Do you want to learn more about options? Or is there something else you want to read more on? If so, please send your feedback to ben.lilly@jarvis-labs.xyz. We want to hear from you!

About Jarvis Labs: We are a one-stop shop for crypto traders looking for trading solutions and insights. Our autonomous AI/ML trading system, Jarvis, runs at the heart of everything we do. Jarvis tracks over 600 wallets and over 80 metrics across five blockchains in real-time to deliver signals. These signals fuel our autonomous trading in options, futures, perpetual futures and spot market. You can learn more at www.jarvis-labs.xyz