How To Trade Crypto Options With Risk Reversal on Deribit

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In this article I will shed some light how to apply risk reversal options trading strategy with crypto on the Deribit platform

Disclosure:  This article contains affiliate links to bitcoin options trading website, by clicking on links on this page and by investing with deribit, I will earn affiliate income at no cost to you. Also, I'm not a financial advisor and I don't give you any advice, I'm just sharing my own experience. Investments in stocks, funds, bonds or cryptos are risk investments and you could lose some or all of your money. Do your due diligence before investing in any kind of asset.

On September 13, 2022 Solana was trading above $38 and I was looking to perform a buy/write operation - buying 1 Coin on Coinbase and simoultenoulsy selling a call option with a strike price of $39 and expiry on the next day (September 14, 2022).  For this call option, I was looking to take quite juicy 0.018 SOL premium, that is 1.8% premium daily.  

I also considered that the SOL price could actually fall, as many technical indicators were showing that. And I was looking for ways how to protect my position on the possible downside, so I looked at buying a long put with a lower strike price. Put with the same day expiry and with the strike price 35 was trading at 0.005 SOL. And I decided to take it, just in case SOL will fall in the coming 24 hours I will limit my downside risk with this put options.

I didnt had to wait long, and SOL indeed fell by more than 2 dollars.

Solana trading on September 13, 2022

Here is the trade setup:

  • SOL-14SEP22-39-C    trade    open sell    1    -1    0.018
  • SOL-14SEP22-35-P    trade    open buy    1    1    0.005

In the aftermath of this trade, I kept 0.013 SOL

What happens next?

On the expiry date, September 14, 2022, SOL is trading under $39 but above $35 per coin -  options expire worthlessly and I keep the premium and start over - if SOL trades above $39 on the expiry date, I pay the difference in crypto. Say SOL trades $40 on expiry, I need to pay the difference between the spot price and strike price, which is $1, in crypto which would equal 0.025 SOL.

I would be left with 1+0.013-0.025= 0.988 SOL

But as the SOL price increased from $38.04 to $40, my coins would be worth $39.52. To book this profit I would need to exchange them back on exchange. My profit would be $1.48 or about 3.89% in just one day. Quite a good outcome. Especially if done with more coins, say some 100.

Some would argue saying, I would make more if I would just keep the coin and not do anything, well for such outcome indeed. But what I always ask to nahsayers - how to know when to take this profit then?

Now let's look at some more extreme cases, say SOL in the next 24 hours drop to $34

My short call options will expire worthlessly and I will keep the premium, but my long put with the strike price of $35, will earn me $1 in crypto.

Here is the outcome: 1+0.013+0.029= 1.042 SOL

With the new price of $34, my holding would be worth just $35.42, or I would take a loss (in dollar terms) of $2.62 or about 6.88%, while I would have more coins I had at the start and I could sell more call options. Actually I would earn 0.042 coins on such a move.

Interested to learn more? I'm offering paid - online live course Risk Reversal Options Trading Strategy