Options trading is one of the most popular investment strategies in the traditional financial markets. This now extends to the crypto market for traders who want to diversify their portfolios. Let’s start by explaining what crypto options trading is and why it’s popular among traders.
How Does Crypto Options Trading Work?
Crypto options trading is an advanced trading strategy wherein speculations on the price movement of cryptocurrencies can be made without the necessity of owning them. It usually involves two parties, which are the buyer and the seller. It grants the buyer the right, but not the obligation, to purchase or sell an asset at a predetermined time and price.
In crypto options trading, the underlying asset is the crypto itself. Traders can choose to purchase a call option if they anticipate the price of the crypto asset will increase. Alternatively, they can choose a put option if they believe the price will decrease. This approach proves beneficial for traders seeking to mitigate risks and exposure to volatile assets and markets.
The initial investment for options trading is less than that for crypto futures. Unlike futures contracts, which follow the underlying asset’s price, the value of options is derived from their strike price. This is known as a premium, which is based on a combination of factors such as the option’s position in and out of money and its intrinsic value.
2 Types of Crypto Option Contracts
There are two types of crypto-options contracts. These are Call Option and Put Option.
The holder of a Call Option has the right to buy the underlying asset at a specified price, which is known as the strike price. Investors select these contracts because they anticipate that the market price of the asset will exceed the strike price when it expires. By executing this, the holder can acquire the asset at a lower price than its current market value.
To understand this clearly, let’s take an example. Suppose a person intends to buy a Call Option for Ethereum, which will expire in 5 days. The strike price is $1200 with a premium of $15. If the price of Ethereum increases from $1200 to $1300 during this period, the investor will exercise the option to buy Ethereum at the predetermined strike price, thereby making a profit.
A Put Option gives the holder the right to sell the asset at a predetermined price that does not depend on its actual market value. Investors go for Put Options when they feel that the strike price of the contract will increase more than the market price at the time of expiration. This allows them to sell their crypto assets at a higher price than the market rate.
For instance, let’s suppose that an investor desires to procure an Ethereum Put Option. The contract involves a strike price of $1200 and a premium of $15. Thus, if the price of Ethereum decreases from $1200 to $1100 before the expiration of the option, the investor can secure a profit of $85 by exercising the option. The profit is derived from the difference between the market price and the strike price.
How Do I Start Trading Crypto Options?
To begin trading crypto, traders simply have to create a Put or Call Option. These contracts come with a strike price and an expiration date. They are normally listed on crypto exchanges that provide crypto option trading. After buying the contract, the buyer can either exercise it or trade it further.
To begin trading, one must choose a suitable cryptocurrency options exchange and open an account. Once the account is created and the funds are deposited, the trader is ready to start trading options immediately.
What Are Some of the Most Used Crypto Options Trading Strategies?
Some of the most popular crypto options strategies are the Bull Market and the Bear Market.
In a bull market, the prices of the majority of assets have an upward trend. In such a scenario, a trader can buy call options to earn a profit. The best thing about buying call options is that the trader limits their risk as they aren’t mandated to exercise the option if the price doesn’t increase.
In a bear market, Put options are ideal as asset prices have been falling. Using this option allows the trader to earn a profit after selling it at a higher price.
How Is Crypto Options Trading Different Than Traditional Options Trading?
Two main factors differentiate traditional options trading from crypto options trading. These are time and volatility. Financial markets are usually open from 9:00 a.m. to 5:00 a.m. from Monday to Friday. This means traders can only make trades during this time period. In case anyone wants to trade at night or on a weekend, the order will only get fulfilled when markets open.
On the other hand, the crypto market operates on a 24/7 basis with no downtime. Secondly, the crypto market is also more volatile, leading to higher profits with higher risks. The traditional options market tends to be more stable than the crypto options market.
Crypto options trading provides a much-needed tool for traders to diversify their portfolios and mitigate risks in uncertain markets. While the profit potential is higher, traders should be careful about the amount of risk they are taking in.
Frequently Asked Questions
Which Cryptocurrency Exchange Supports Options Trading?
Not all cryptocurrency exchanges support options trading, and they are few and far between. Some of the best crypto exchanges to conduct options trading include Deribit, OKX, StormGain, and Delta Exchange.
Who Can Trade Cryptocurrency Options?
Anyone who is interested in cryptocurrency options trading can do so as long as they have a crypto exchange or platform account, a trading strategy and risk management plan and a basic understanding of crypto options.
How Do I Choose a Cryptocurrency Options Contract?
Choosing a cryptocurrency option trading contract requires defining one’s trading goal and risk tolerance, selecting the cryptocurrency and the option type, picking the strike price and the expiration date, and finding a reliable and suitable crypto exchange or platform.
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