Options Trading in Cryptocurrency: A Comprehensive Examination

Published on 25 April 2023 by masternode.one in Liquidity

Crypto options trading at masternode

The cryptocurrency market has experienced significant growth in recent years, leading to a diversification of financial instruments available to traders. Among these instruments, options trading has emerged as a highly sought-after tool for hedging and speculating within the digital asset domain. In this article, we will first delve deeply into the intricacies of cryptocurrency options trading, placing emphasis on advanced analytics techniques, risk management, and portfolio optimization. We will present a thorough analysis of the market dynamics as they stood on April 23rd, 2023, drawing insights from the Amberdata report to comprehend the factors influencing the market and the subsequent implications for traders.

Next, we will investigate the distinctions between algorithmic trading with cryptocurrency options on centralized exchanges such as Deribit and decentralized exchanges like PsyOptions. These two types of platforms each offer unique benefits and challenges for traders, and understanding the differences between them can help inform the decision-making process for trading strategies.

Finally, we will delve into one of Masternode’s favorite option strategies: Option covered calls. This approach offers a means to generate additional income or protect a long position in a cryptocurrency, and we will explore the mechanics, advantages, and potential drawbacks of implementing this strategy in a dynamic digital asset market.

As the cryptocurrency space continues to evolve, understanding these various elements of options trading becomes increasingly important for traders seeking to maximize their returns and minimize their risks. By examining advanced analytics, comparing trading platforms, and dissecting popular strategies, this article aims to provide a comprehensive and valuable resource for those looking to navigate the complex world of cryptocurrency options trading.


The evolution of the cryptocurrency market has led to the introduction of various financial instruments, including futures, options, and swaps. Options trading has become an increasingly popular method for investors to hedge their positions and speculate on the price of cryptocurrencies. The cryptocurrency options market has grown in tandem with the overall digital asset ecosystem and now offers a wide range of contracts for different assets, timeframes, and strike prices. This article provides an in-depth examination of cryptocurrency options trading, focusing on advanced analytics, risk management, and portfolio optimization.

The Current State of the Cryptocurrency Options Market

On April 23rd, 2023, the cryptocurrency options market witnessed significant activity. The Amberdata report highlights that the market had an aggregate open interest of $12.4 billion, with Bitcoin and Ethereum options accounting for the majority of the trading volume. The report also points to an increase in implied volatility, which is an important metric for options traders to assess the risk associated with their trades.

Advanced Analytics Techniques

Advanced analytics play a crucial role in understanding the complex dynamics of the cryptocurrency options market. Some key techniques include:

a) Implied Volatility: This metric measures the expected future volatility of an underlying asset, derived from the market prices of options. It is critical for options traders to monitor implied volatility, as it affects the pricing of options contracts and provides insights into market sentiment.

b) Skew: The skew is a measure of the perceived risk in the market, determined by analyzing the difference between the implied volatilities of out-of-the-money (OTM) calls and puts. A positive skew indicates that OTM calls are more expensive than OTM puts, suggesting that the market anticipates a potential upside move. Conversely, a negative skew suggests that the market is pricing in downside risk.

c) Historical Volatility: This metric quantifies the past price fluctuations of an underlying asset, helping traders to better understand the asset’s risk profile and make informed decisions about their options positions.

Risk Management with Options Trading

Options trading involves various risks, such as directional risk, volatility risk, and time decay risk. Traders can mitigate these risks by employing strategies such as protective puts, covered calls, and iron condors. By actively managing their options positions and adjusting their strategies based on market conditions, traders can minimize their exposure to risk and improve their overall portfolio performance.

Protective puts are a popular options trading strategy employed by investors seeking to hedge their long positions in an underlying asset. This strategy involves purchasing put options on the same asset that the investor holds a long position in, providing insurance against a potential decline in the asset’s value. If the asset’s price falls below the strike price of the purchased put option before its expiration date, the investor can exercise the option, selling the asset at the predetermined strike price and limiting their losses. In the event that the asset’s value does not fall below the strike price, the put option expires worthless, but the investor’s loss is limited to the premium paid for the option. Overall, protective puts can serve as an effective risk management tool, providing downside protection while still allowing for upside potential if the underlying asset’s value increases.

Iron condors are an advanced options trading strategy designed for generating income with limited risk in a range-bound market. This strategy consists of two vertical spreads – a bull put spread and a bear call spread – which are established simultaneously. An iron condor is constructed by selling an out-of-the-money (OTM) put option and buying a further OTM put option with a lower strike price, while also selling an OTM call option and buying a further OTM call option with a higher strike price. All options must have the same expiration date. The primary objective of an iron condor is to capitalize on the time decay of options premiums while minimizing the risk of significant price movements in the underlying asset. If the asset’s price remains within the range established by the sold put and call options, the investor can collect the premiums from both spreads, realizing the maximum profit. However, if the asset’s value moves beyond the range of the sold options, the investor’s losses are limited by the purchased put and call options. As such, iron condors can be an effective strategy for generating income in stable or sideways markets with minimal risk exposure.

Later in this article we will take a closer look at the “covered calls” strategy.

Portfolio Optimization with Options Trading

Cryptocurrency options can be an integral part of a well-diversified investment portfolio. By incorporating options strategies, investors can enhance their returns, hedge against potential losses, and gain exposure to a wide range of digital assets. Portfolio optimization techniques, such as the Black-Litterman model or the Kelly criterion, can help investors to allocate their capital efficiently and maximize their risk-adjusted returns.

Central Options Exchanges vs Decentralized Options Exchanges

Central Options Trading Exchanges: Deribit

Deribit is a central exchange that specializes in cryptocurrency options trading. One of the main benefits of trading on a central exchange like Deribit is the increased liquidity and stability compared to decentralized exchanges. This increased stability can lead to tighter bid-ask spreads, making it easier for algorithmic traders to execute trades at the desired price. Additionally, central exchanges like Deribit typically offer more advanced trading tools and features, such as the ability to trade with leverage and the option to use advanced order types like stop-loss orders.

Another benefit of trading on a central exchange like Deribit is the increased security compared to decentralized exchanges. Central exchanges are typically subject to more rigorous security measures, including multi-factor authentication, and are also backed by professional security teams. Additionally, central exchanges like Deribit typically hold customer funds in cold storage, making it much harder for hackers to access the funds.

However, there are also some drawbacks to trading cryptocurrency options on a central exchange like Deribit. One of the main drawbacks is the increased regulation compared to decentralized exchanges. Central exchanges like Deribit must comply with regulations from various jurisdictions, which can limit the types of trades that can be executed and the instruments that can be traded. Additionally, central exchanges like Deribit typically charge higher fees compared to decentralized exchanges.

Decentralized Options trading Exchanges: PsyOptions

PsyOptions is a decentralized exchange that specializes in cryptocurrency options trading. One of the main benefits of trading on a decentralized exchange like PsyOptions is the increased freedom compared to central exchanges. Decentralized exchanges like PsyOptions are not subject to the same level of regulation as central exchanges, allowing traders to execute a wider range of trades and access a wider range of instruments. Additionally, decentralized exchanges like PsyOptions typically charge lower fees compared to central exchanges.

Another benefit of trading on a decentralized exchange like PsyOptions is the increased privacy compared to central exchanges. Decentralized exchanges like PsyOptions typically do not require personal information from traders, making it much harder for authorities to track or regulate the trades. Additionally, decentralized exchanges like PsyOptions typically use smart contracts to execute trades, making it much harder for hackers to access the funds.

However, there are also some drawbacks to trading cryptocurrency options on a decentralized exchange like PsyOptions. One of the main drawbacks is the decreased liquidity and stability compared to central exchanges. Decentralized exchanges like PsyOptions are typically subject to more price volatility, making it more difficult for algorithmic traders to execute trades at the desired price. Additionally, decentralized exchanges like PsyOptions typically offer fewer trading tools and features compared to central exchanges.

Example strategy: Option covered calls

There are numerous strategies within the realm of options trading, each with its own unique characteristics, benefits, and risks. Examples of these strategies include iron condors, straddles, strangles, vertical spreads, and calendar spreads. While these methods can be effective under certain market conditions, one particularly popular approach for income generation is the option covered call strategy. In this section of the article, we will delve into the concept of option covered calls, elucidating their mechanics, potential advantages, and associated risks.

What are Option Covered Calls?

An option covered call is a strategy that involves selling call options on a stock that you already own. The goal of this strategy is to generate additional income from your portfolio while also potentially reducing risk. When you sell a call option, you are essentially giving the buyer the right, but not the obligation, to purchase your stock at a set price, known as the strike price, on or before a specified date. In return for giving up this right, the buyer pays you a premium, which is the income you receive for selling the call option. Option covered calls are an appealing method for investors who seek to augment their income through the strategic use of options contracts. This strategy entails selling call options on an asset, such as a stock or cryptocurrency, which the investor already possesses. By implementing this approach, investors can receive premiums from the sale of call options, thereby generating supplementary income in addition to the potential appreciation of the underlying asset.

How Option Covered Calls Work

To implement an option covered call, you must first own the stock on which you want to sell the call option. Next, you would sell a call option on the stock with a strike price above the current market price. If the stock price remains below the strike price, you keep both the stock and the premium received from selling the call option. If the stock price rises above the strike price, the buyer of the call option may exercise their right to purchase your stock at the strike price, but you would keep the premium received from selling the call option.

Benefits and Risks of Option Covered Calls

Option covered calls can provide several benefits to investors, including the potential to generate additional income from their portfolios, reduce risk, and potentially limit losses. By selling call options, investors can potentially reduce the risk of holding a stock, as they are able to lock in a portion of the stock’s value through the premium received from selling the call option. Additionally, by selling call options, investors can potentially limit their losses if the stock price falls, as they would keep the premium received from selling the call option.

However, option covered calls also come with several risks. First and foremost, selling covered calls can limit the upside potential of the underlying asset, as the investor is obligated to sell it at the strike price if the buyer exercises the option. Additionally, while the premiums collected can help cushion potential losses, they may not be sufficient to cover significant declines in the asset’s value. So, if the stock price rises significantly above the strike price, the buyer of the call option may exercise their right to purchase your stock, which would result in you losing potential gains from the stock price increase. Additionally, if the stock price falls, you would still be required to sell your stock at the strike price, potentially resulting in a loss. Moreover, the tax implications of this strategy should be taken into consideration, as the income generated through premiums may be subject to taxation.

Options trading @ Masternode?

Masternode.one is currently in the process of developing a sophisticated, tailor-made algorithmic options trading strategy for digital assets. This cutting-edge approach combines advanced quantitative techniques, machine learning, and artificial intelligence to optimize risk-adjusted returns and maximize efficiency in a highly complex and dynamic market environment.

The foundation of this innovative strategy lies in the application of advanced statistical models and machine learning algorithms, such as recurrent neural networks (RNNs) and long short-term memory (LSTM) networks, to forecast underlying asset prices and implied volatility. By leveraging vast amounts of historical and real-time data, these models can identify intricate patterns and trends that may not be discernible through traditional analysis techniques. Additionally, the integration of Bayesian networks and reinforcement learning enables the algorithm to continuously learn and adapt to evolving market conditions, ensuring that the trading strategy remains robust and responsive to changes in the cryptocurrency landscape.

RUST Code example of LSTM Network implementation using tch-rs crate (Tensorflow bindings for Rust):

use tch::{nn, nn::Module, nn::OptimizerConfig, Device, Kind, Tensor};

// Define the LSTM network structure
struct LSTMNetwork {
    lstm: nn::LSTM,
    linear: nn::Linear,

impl LSTMNetwork {
    fn new(vs: &nn::Path) -> LSTMNetwork {
        let lstm = nn::lstm(vs, 128, 64, Default::default());
        let linear = nn::linear(vs, 64, 1, Default::default());
        LSTMNetwork { lstm, linear }

impl nn::Module for LSTMNetwork {
    fn forward(&self, xs: &Tensor) -> Tensor {
        let output = xs
            .apply_t(&self.lstm, true)

// Training loop example
fn main() {
    let device = Device::Cpu;
    let vs = nn::VarStore::new(device);
    let mut model = LSTMNetwork::new(&vs.root());
    let mut opt = nn::Adam::default().build(&vs, 1e-3).unwrap();

    // Load your data as input and target tensors
    let input_data = Tensor::randn(&[64, 10, 128], (Kind::Float, device));
    let target_data = Tensor::randn(&[64, 10, 1], (Kind::Float, device));

    for epoch in 1..=100 {
        let output = model.forward(&input_data);
        let loss = output.mse_loss(&target_data, tch::Reduction::Mean);
        println!("epoch: {:4} loss: {:?}", epoch, loss);

One of the critical components of this advanced algorithmic approach is the utilization of the Black-Scholes-Merton (BSM) formula and its extensions, such as the Heston model, to price options and assess their sensitivity to various factors. This involves calculating the option’s Greeks – delta, gamma, vega, theta, and rho – to effectively manage risk and optimize the portfolio’s exposure to different market scenarios. Furthermore, the algorithm incorporates sophisticated risk management techniques, including the use of Value-at-Risk (VaR) and Conditional Value-at-Risk (CVaR) measures, to ensure that the strategy maintains a predefined level of risk tolerance.

Rust Code example of the Black-Scholes-Merton (BSM) Option Pricing Formula:

use std::f64::consts::PI;

// Normal cumulative distribution function
fn cdf(x: f64) -> f64 {
    let k = 1.0 / (1.0 + 0.2316419 * x.abs());
    let k_sum = k
        * (0.319381530 + k
            * (-0.356563782 + k
                * (1.781477937 + k
                    * (-1.821255978 + k * 1.330274429))));
    let cdf_val = if x >= 0.0 {
        1.0 - (1.0 / (2.0 * PI).sqrt()) * (-x * x / 2.0).exp() * k_sum
    } else {
        1.0 - cdf(-x)

fn bsm_call_option_price(s: f64, k: f64, t: f64, v: f64, r: f64) -> f64 {
    let d1 = ((s / k).ln() + (r + 0.5 * v * v) * t) / (v * t.sqrt());
    let d2 = d1 - v * t.sqrt();
    let call_price = s * cdf(d1) - k * (-r * t).exp() * cdf(d2);

fn main() {
    let stock_price = 100.0;
    let strike_price = 110.0;
    let time_to_expiration = 1.0;
    let volatility = 0.25;
    let risk_free_rate = 0.05;

    let call_option_price = bsm_call_option_price(
    println!("Call option price: {:.2}", call_option_price);

Another essential aspect of this complex strategy is the employment of multi-objective optimization algorithms, such as the Non-dominated Sorting Genetic Algorithm II (NSGA-II) and Particle Swarm Optimization (PSO). These algorithms facilitate the simultaneous optimization of multiple objectives, including expected return, portfolio diversification, and risk-adjusted performance, ultimately resulting in a Pareto-optimal set of trading decisions. The inclusion of these advanced optimization techniques allows the algorithm to identify the most efficient combination of options strategies, such as protective puts, iron condors, and vertical spreads, to achieve the desired portfolio outcomes.


Cryptocurrency options trading has emerged as an essential tool for investors to navigate the digital asset space. By leveraging advanced analytics, managing risks effectively, and optimizing their portfolios, traders can harness the potential of options trading to achieve superior performance. As the cryptocurrency market continues to mature, the importance of options trading and its associated analytical techniques will only grow.

Algorithmic trading with cryptocurrency options on central and decentralized exchanges each have their own unique benefits and drawbacks. Central exchanges like Deribit offer increased liquidity, stability, and security, but are subject to more regulation and charge higher fees. Decentralized exchanges like PsyOptions offer increased freedom, privacy, and lower fees, but are subject to decreased liquidity and stability. When deciding whether to trade

Option covered calls are an intriguing and widely-used strategy in the options trading sphere, allowing investors to leverage their existing long positions in assets to generate extra income through the sale of call options. While this approach does come with certain risks, such as limited upside potential and tax implications, it can be a valuable tool for investors seeking to optimize their portfolios and enhance their returns. In future articles, we will delve deeper into the mechanics, nuances, and practical applications of the option strategies, equipping readers with the knowledge necessary to effectively navigate this aspect of options trading.

Masternode.one is actively working on a highly advanced and complex algorithmic options trading strategy for cryptocurrencies that harnesses the power of machine learning and artificial intelligence. By employing advanced statistical models, option pricing techniques, risk management methodologies, and multi-objective optimization algorithms, this groundbreaking approach aims to deliver superior risk-adjusted returns and adapt to the ever-changing dynamics of the digital asset market. As Masternode.one continues to refine and perfect this innovative strategy, the company anticipates deploying it on their infrastructure later this year, setting a new benchmark in the realm of algorithmic options trading for cryptocurrencies.