Top Options Trading Strategies to Use With Bybit Portfolio Margin
Options trading is famous for its versatility with leverage trading and hedging and for speculative purposes. Using Bybit Portfolio Margin for options trading elevates the trading process by streamlining one's assets in a single account, mitigating risk and improving overall returns. It enables portfolio diversification across multiple markets and asset classes, creating a more complex trading scene. We've put together a few strategies to help you trade more effectively with Bybit Portfolio Margin in different scenarios. Let's dive right into it.
Key Takeaways:
Bybit Unified Trading’s Portfolio Margin function allows traders to use less margin to trade with enhanced capital efficiency.
The activation of Portfolio Margin lowers the overall risks on your derivatives portfolio, offsetting the long and short position on options contracts by evaluating the mark price and market volatility.
The options trading strategies listed — perpetual spread, bull spread, delta hedging, and short and long strangle strategies — help traders protect their options and increase their winning probabilities.
What Is Portfolio Margin?
Portfolio Margin (PM) mode, a function of the Bybit Unified Trading Account (UTA), aims to help traders optimize the margin requirements of a portfolio. This function applies to USDC Derivatives accounts, where the long and short positions help across the perpetual and options contracts can be netted against one another.
Whenever a user activates Portfolio Margin mode, it rebalances the margin requirements based on the overall portfolio risks, rather than the individual positions. The system will reduce the margin requirements according to state-of-the-art algorithms and hedging techniques. For example, suppose you're using it on USDC Derivatives accounts, in which the long and short positions are held across the perpetual and options contracts. In that case, these positions will be netted against one another.
Learn more: How to Use UTA for Risk Management
Why Should You Trade Crypto Options?
Crypto options and traditional crypto trading offer traders an opportunity to maximize profits using different trading strategies. However, options trading offers several distinct advantages from traditional trading products. The following are some examples.
Hedging Instrument
For traders looking to manage risk and capitalize on market movement, options are a popular investment strategy. Crypto options, for example, are contracts that allow the trader to buy or sell an asset at a specified price within a given time frame or by a specific expiration date.
Suppose the option expires in-the-money (ITM). In that case, the trader's account will receive a credit or debit based on the cash difference between the strike price and the settlement price, without requiring them to actually buy or sell the underlying asset.
Learn more: How to Hedge With Crypto Options
Profit Amplification
Options provide a gateway for retail traders to get started in crypto trading with minimal capital. When trading options, you’re buying a contract with a minimal entry price at a calculated risk to gain access to a large number of underlying assets. With leverage, options traders can multiply their buying power with minimal invested capital. In other words, the trader is leveraging the value of the underlying security for a maximum return on investment.
Best Options Trading Strategies Using Portfolio Margin
USDT-USDC Crypto Arbitrage Strategy
While crypto prices are typically assumed to be priced as efficiently as possible due to the efficient market hypothesis and price discovery environment, sometimes pricing inefficiencies will still exist due to a lack of liquidity or sudden move in the market. That’s where the spot perpetual arbitrage strategy comes in. By taking into account the differences in pricing between USDT and USDC pairs for the same crypto asset, risk-free profits can be secured when traders simultaneously execute trades to correct this pricing discrepancy in the crypto market. This effectively works as a form of arbitrage and takes advantage of the pricing discrepancies that might be present between both USDT and USDC pairs for the same crypto asset.
For further clarity, let’s illustrate this with a hypothetical scenario.
Scenario:
A brief example would be a trader noticing a pricing discrepancy between the USDT and USDC pairs for Bitcoin and deciding to make an arbitrage trade based on the spot price of BTC. Let’s go with the current example of BTC’s spot price being $30,000. On the spot pair side of things, BTCUSDT is currently $30,020 and BTCUSDC is currently $30,027.
Trading Strategy:
To initiate the trade, traders can begin by purchasing 1 BTC for 30,020 USDT. Then, they can close the trade by instantly closing the position and selling that 1 BTC for 30,027 USDC. This nets arbitrage traders a $7 in profit, assuming both USDC and USDT have a notional value of $1.
Margin:
By making use of Bybit’s UTA, traders can make use of UTA-PM mode to increase their profits by 10x (assuming 10x leverage for spot pairs) and enhance their existing capital efficiency.
Long Far Month Bull Spread Strategy
Traders can opt to use the bull spread approach to buy and sell call options on the same asset with different strike prices if they have a bullish outlook on the underlying crypto asset.
The concept is relatively simple and involves capitalizing on the price movement by buying a call option with a lower strike price, then selling a call option with a higher strike price to earn the differences in the form of a spread. Whenever the asset price rises, the purchased call option will increase while the value of the sold call option will decrease, which results in a net gain.
Learn more: What Is a Bull Put Spread Strategy?
Scenario:
Trader A has a bullish perception on the price of BTC and chooses to open a bullish option strategy. Also, Trader A thinks that the volatility curve is too steep in BTC's options that are further out in expiry, and the implied volatility of out-of-the-money (OTM) options is overestimated compared with that of at-the-money (ATM) options. Therefore, Trader A buys ATM options and sells OTM options for BTC.
Trading Strategy:
Suppose the current BTC price is $30,000. Trader A then buys the 30500c BTC call contract with an expiration date of 36 days and sells the 33500c BTC call contract with the same expiration date. This grants Trader A net positive delta of about $0.27 and a net debit in option premiums of about $965. In other words, this translates to $0.27 in profit with every dollar increase in BTC and Trader A spending $965 for a single bull call spread.
Margin:
Thanks to the use of UTA-PM and UTA-RM modes, overall capital efficiency is improved as the existing assets within the portfolio are consolidated and traders can avoid liquidation because of the lack of risk amplification from a single loss.
Short Strangle Strategy With Short Expiration Dates
Traders use this strategy to write both call and put options simultaneously with the same expiration date but with a different strike price to profit from the premium after selling these options contracts.
Scenario:
In our hypothetical scenario, this involves Trader A selling an out-of-the-money call option and an out-of-the-money put option with a short-term expiration date. Traders profit from the premiums when selling the options whenever the strike prices for the two options remain within the range of the strike prices of the options contracts written
Trading Strategy:
For example, Trader A trades BTC options and sells a call option with a strike price of 33500 and a put option with a strike price of 29500 while BTC is trading at $30,000. If BTC trades within the range of $29,500 to $33,500, then Trader A profits as the out-of-the-money option contracts expire worthless while getting to keep the profits collected from when the option contracts were written.
Margin: As writing naked crypto option contracts are considered risky, the margin demands involved with executing such an options strategy will be high. With UTA-PM, traders can write the call and put contracts without fear of liquidation because of the lowered margin requirements.
The Bottom Line
A combination of options trading strategies is widely used to help maximize and hedge against potential risks associated with the various types of options contracts. The use of portfolio margin can increase a user's capital efficiency with a lower margin involved. Still, options strategies are relatively complex for beginners, as they involve many other factors that may trigger a counter effect. Therefore, invest in options only if you’re confident with the fundamentals.
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