It can be a bit nerve-wrecking for newcomers to trade crypto-currency options because it is much more sophisticated than investing on the spot market. Options contracts, despite their intricacy, have special benefits. In comparison to other leveraged securities like crypto-currency futures or perpetual swaps, crypto options are frequently a less expensive and risky way to trade cryptocurrency. When done correctly, they can be quite profitable. You should educate yourself on the fundamentals of options trading before you start trading crypto options.
How Do Crypto Options Work?
Cryptocurrency options are financial contracts, similar to regular options contracts, that provide you the choice, but not the duty, to buy or sell cryptocurrency (like Bitcoin) if the price rises over a specific threshold within a predetermined time frame.
Benefits of cryptocurrency options
- Higher capital efficiency
- Less risky than standard derivatives like futures and swaps; potential for larger percentage returns
- By merging two or even more options contracts, you can provide strategic possibilities.
Five essential details regarding a cryptocurrency options contract which the Crypto boom has elaborated are as follows:
the asset that serves as the basis for a derivative contract. BTC and ETH are the two most popular underlying assets for cryptocurrency options.
Options to consider
Two categories of options are available for purchase or sale:
- Call: An options agreement that offers you the option to purchase a cryptocurrency asset within a specified time frame at a predetermined price.
- Put: A type of options agreement that allows you the opportunity to sell a cryptocurrency asset at a defined price and within a specified time frame.
Date of expiration
The time at which the options contract expires. On this date, your ability to purchase or sell a cryptocurrency asset at the designated price will end.
Price per strike
The cost at which, should you decide to exercise the option, you can purchase or sell the cryptocurrency asset.
The cost of a particular option being used.
How does it function?
Let’s imagine you predict that the price of bitcoin will shortly reach $50,000.You choose to acquire a margin call that entitles you to buy Bitcoin at the strike price of $40,000 at any moment throughout the following month. You must pay a “Premium,” which is the cost associated with purchasing the call option contract. Assume that the premium paid in this instance is $400, or 1 percent of the strike price.
You have two options when BTC exceeds $50,000 on the expiration date: One of two options is to 1) execute the option and purchase BTC for almost the price of $40,000 before selling them for $50,000 on the spot market, or 2) sell the option contract it before ends for a profit because BTC has increased in value.
How are crypto options traded?
Select a type of option
Depending on how you anticipate the fundamental crypto asset will perform in the coming years, select an options contract:
Purchase a Bitcoin call option or trade a BTC option contract if you believe the price of Bitcoin will increase.
Buy a Bitcoin put option or sell a Bitcoin call option if you believe the price of Bitcoin will decline.
Calculate the strike price
An option’s value is determined by how the price of the underlying asset compares to the strike price. Moneyness is another name for this. When describing whether a contract is “In-The-Money,” “Out-of-The-Money,” or “At-The-Money,” the term “moneyness” is used.
When purchasing a margin call, it is referred to as being “In-The-Money” if the underlying cryptocurrency’s price is higher than the strike price. In contrast, when the price falls below the strike price, the option holder is “Out-of-The-Money.” When the actual cost is close to the market price, it is dubbed “At-The-Money”.
When the value of the underlying asset is lower than the strike price, put options are “In-The-Money.” The opposite is true for “Out-of-The-Money,” where the price is now higher than the strike price.
Make sure the striking price reflects your expectation for the location of the underlying asset throughout the option when purchasing or selling it.
For instance, you would purchase a margin call with a market price of less than $50,000 if you anticipated that BTC would increase between $40,000 to $50,000 at some point in the future. The option is “In-The-Money” if the price goes up above the strike price.
Similar to this, if you believe BTC will drop to $30,000, you would purchase a put option providing you the opportunity to sell, with a strike price higher than $30,000. Your choice is “In-The-Money” if the price falls below the strike price.
Establish the potential time frame.
There is an expiration date on options contracts that indicates when you may exercise them.
There are two categories of choices: American choices and European choices. Anytime before or on the expiration date, an American option may be exercised. European options, meanwhile, can only be utilized on the day they expire. American options are typically more costly than European options since they provide the buyer more flexibility (and the seller more risk).
Expiration dates might be as short as a day or as long as a year. The longer you have towards your price target to materialize, the longer the expiration. Therefore, an option will cost more the lengthier the expiration period.
If you want to trade options profitably, whether you’re a beginner or an expert trader, you’ll need a platform that leads the industry. The USDC Options platform from Crypto boom, is a fantastic place to begin. When investing in Crypto boom, you’ll get access to top-notch resources and infrastructure that will advance your understanding of options trading.
Leave a Reply