Should you trade cryptocurrency options?

tl;dr: use ledgerx.com to trade options on crypto. Traders can bet on big moves for very little, while holders can sell covered options. Each contract represents 1/100th of a bitcoin.

 Is there value in crypto? 

I think cryptocurrencies, by and large, are stupid. I have found one use for them: sending money to people outside the US without having to pay Western Union or a bank to wire it. Beyond that, cryptocurrencies haven't done anything for me finance-wise that Venmo and Zelle can't do. 

However, I will literally do anything to make money. I used to sell my blood plasma for beer money in college. I encouraged my chick friend to hook up with a dude in his car for cocaine, and then I sold the coke back to that guy's friend. Literally free money.

Given the level of financial inclination described above, I did not want to miss out on the crypto market as a speculation tool. While you can just buy and sell cryptocurrencies through an exchange to speculate, the commissions on proper brokers are high, and peer-to-peer systems are sketchy and take longer to process. Giving back 1% on every round-trip trade for commissions is a killer.

What many people do not know is that you can trade options on Bitcoin (BTC) and Ethereum (ETH). Unlike stock option contracts which represent 100 shares of the underlying, you don't need 100 BTC to sell covered contracts. In fact, each contract represents just 1/100th of a BTC, so you can theoretically buy out-of-the-money (OTM) contracts for less than $1.

How do you do it?

The best exchange I have found for individuals is LedgerX Omni at LedgerX.com. As far as I know, it is the only federally regulated BTC options exchange in the US. I moved 1/100th of a BTC to LedgerX to test their platform and have been wheeling it for a few months. I can now tell you with confidence that there is money to be made on this platform.

Here is what the user interface looks like on desktop:

It is a pretty straightforward UI, and you can see my open cash-secured put at the bottom.

More importantly than a clean UI is the utility and liquidity of the options contracts. Let's take a closer look at the strikes and expiration dates. 

LedgerX supports near-week options, so you can trade weeklies if you want. Alternatively, you can play monthlies that offer more liquidity. With BTC trading at just over $9,000 as of this writing on March 6, 2020, we have 4,200 at-the-money (ATM) contracts open for the March 27 expiration. That open interest pales in comparison to just about any stock option. However, there is enough BTC OI to keep markets moving. Keep in mind that since every contract represents only 1/100th of a BTC, the entire open interest on March ATM contracts is 42 BTC.

If you're looking closely, you'll see that the bid/ask spreads are fairly wide. This is likely due to the relatively limited open interest. Let's talk more about this in the risk section.

What are the benefits of trading crypto options?

If used properly, options can do two things here:

1) You can speculate on volatility for very little. For example, each contract of the March 27th $10,500 strike costs only $0.88. For less than a dollar, you can bank on big moves if you are that bullish; and
2) Since holding cryptocurrency is a risky move, you can use options to reduce your basis and turn your holdings into a stream of income. Even the most bullish BTC holders can benefit. Have 1 BTC that you're willing to part with in June for $25,000? Someone will pay you about $100 for selling them that call. You could also sell the $10,000 strike for $1,050 if you're not quite that bullish.

What are the risks?

There is always risk. In terms of wheeling BTC, here they are:

1) Bid/ask spreads are wide. It is difficult to exit a position early because you will have a hard time selling near the ask or buying near the bid. You'll usually do better waiting for expiration, which can force you to wait a while;
2) Withdrawing from LedgerX costs 0.005 BTC, which is about $45 right now. That is a huge bite for anyone who wants to move money in and out frequently;
3) Bitcoin exchanges are frequent targets of cyberattack, so don't put your life's blood into BTC. LedgerX is federally regulated, but vulnerabilities certainly exist; and
4) Bitcoin, and cryptocurrencies in general, are extremely volatile and can drop to $0 at any time. You don't want to get stuck bagholding useless coins. Likewise, you may find your covered calls deep ITM overnight.

How can we mitigate risk?

There are a few things we can do to reduce risk. Deposit into crypto only what you can afford to lose, as usual for any asset. Use 2-factor authentication for your login to protect yourself if someone takes your username and password but not your device. If you sell covered calls to collect premium, withdraw some of it (when you have some saved up, because you will have that fee to pay) to lower your basis instead of reinvesting 100%. And lastly, never use margin on crypto.

Summary

Options on BTC and other cryptocurrencies represent 1/100th of a coin, so you can presumably get a piece of crypto volatility for with very little capital and still make an appreciable return. This is a great method of speculation for those with low risk tolerance.

Alternatively, long-term crypto hodlers can sell covered options for very high premiums compared to the returns you'd get on equal investments into stocks, enabling you to turn your crypto holdings into an income stream.

Use LedgerX to trade. Transfer in a small holding, enable 2-factor authentication, and seek to lower your basis if you are hodling crypto. Be prepared to pay a substantial withdrawal fee of 0.005 BTC when you wish to withdraw. And finally, never use margin to trade crypto and stay within your personal risk tolerance.

Disclaimer

Options are complicated. Cryptocurrencies are volatile. Trading complicated derivatives on a volatile currency carries unique risks that could cost you all of your investment. The above is Mikey's good-faith assessment regarding how to use options on cryptocurrencies effectively, but be sure to perform your own assessment and identify your personal risk tolerance before trading. Keep in mind that Mikey is not a financial adviser. Also be aware that there are no federally-recognized cryptocurrency-focused financial adviser licenses in the US.