The Dubai-based crypto exchange Bybit announced yesterday that it will be launching a crypto options trading service to its customers to further expand its portfolio of digital asset derivatives.

According to the press release, Bybit will first support short-dated and perpetual options for USDC – the stablecoin issued by Circle. The company has said multiple times that it aims to become a leading player in the growing crypto derivatives market at a time when more and more institutional investors are jumping on board.

With USDC options, crypto traders will now have the possibility of speculating on how the price of a certain digital asset fluctuates against the value of the US dollar. This product will come to join Bybit’s other derivatives, which include futures contracts for multiple cryptocurrencies.

“Options is something that our existing clients have long been asking for since there has been no other revolutionary product offered in the market at the moment”, stated Ben Zhou, the Chief Executive Officer of Bybit, in regards to the launch of the service.

He added: “We are confident that our state-of-the-art offering will set the bar for the sector and normalize crypto options trading, just like what Robinhood did for stock options”.

Last month, Bybit announced that it will be relocating its headquarters from Singapore to Dubai in a move that seeks to expand the firm’s footprint in the wealthy United Arab Emirates (UAE).

This jurisdiction recently approved legislation that favored and promoted the establishment of crypto-related businesses in the country while establishing an official regulatory agency known as the Virtual Asset Regulatory Authority (VARA).

How do options work in crypto?

Options are financial derivatives that give the holder the right, not the obligation, to buy (call options) or sell (put options) the underlying assets at a predetermined price once the instrument expires and, in some cases, before that.

Options are priced based on the volatility of the underlying asset, the supply and demand for the contract, and other complex variables. Traders pay a premium for buying an options contract and, for crypto options, the minimum number of contracts per trade varies from one digital asset to the other.

In addition to the premium paid, traders are also charged a fee per contract and, in some cases, a commission per trade.

Bybit’s direct competitor for crypto options trading – Deribit – currently offers European-style Bitcoin (BTC) and ETH options contracts. These contracts can only be exercised at the expiration date and the exchange offers a cash settlement alternative that pays the holder the difference between the closing and purchasing price.

The minimum order size for BTC options with Deribit is 0.1 option contract. Each contract entitles the holder to buy or sell 1 BTC or ETH.

How can options be used for trading and portfolio management?

Options contracts can be used for two purposes: to speculate or hedge against potential downturns in the price of the underlying asset.

Speculators use options to boost their gains if the price of the underlying asset is expected to rise or decline. This can be achieved by buying call or put options depending on the trader’s directional forecast.

If the price of the underlying asset, in this case Bitcoin or Ethereum (ETH), rises, call options will see their value rise as well. The extent to which the price increases depends on many factors such as the number of days left until the contract expires and the implied volatility of the underlying asset.

Meanwhile, options can also be used to protect a portfolio from a decline in the value of the underlying asset. In the case of crypto, if one is holding a portfolio of BTC and ETH, put options for the two digital assets can be bought as their value will rise and offset the losses that these investments will experience if the market experiences a downturn.

Crypto assets are highly volatile unregulated assets. Your capital is at risk.