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It’s normal for new Options traders to feel overwhelmed. One advantage of trading Options is that it provides you with several ways to profit from what you believe may happen to the underlying security. Nevertheless, the luxury of this variety comes with a higher risk of making mistakes.
In this article, we’ll share some of the most common Crypto Options trading mistakes to help you maximize your profits and make more informed decisions.
But, before we move forward, first, let’s understand Crypto Options trading and some of the most common trading strategies that even newbie investors can adopt. Let’s get started!
Crypto Options trading
A contract known as a Crypto Option provides you with the Option, but not the accountability, to purchase or sell a particular asset at a specific price.
- Call option contract: The right to purchase
- Put option contract: The right to sell
Investors purchase and sell these contracts on an open market through Options trading. This kind of trading essentially lowers risk because there is no onus to buy or sell.
Not all Options trades, however, include risk. With Options trading methods, you may either pay someone to assume the risk on your behalf or get rewarded for doing so. They also let you protect against potential losses while speculating on the price of an asset in the future.
To learn more about Crypto Options trading, click here.
There are various trading strategies for Crypto Options that you should be aware of. Have a look at the following few strategies to get an overview.
5 Common Crypto Options trading strategies
- Long Straddle: This strategy involves buying a call and a put option with the exact same strike price and expiration date. It works best when high volatility is expected in the market, as the profit is made if the underlying asset’s price moves significantly in either direction.
- Short Straddle: This strategy requires selling a call and a put option with the exact same strike price and expiration date. It is used when the trader expects the underlying asset’s price to remain stable within a specific range. The profit is made from the premium received from selling the Options.
- Bull Call Spread: This strategy requires purchasing a call option at a smaller strike price & selling a call option at a larger strike price. The trader makes profits if the price of the underlying asset increases, but the potential profit is limited. This strategy is suitable for bullish market conditions.
- Bear Put Spread: This strategy involves buying a put option at a larger strike price and selling a put option at a smaller strike price. The trader geberates profits if the price of the underlying asset falls, but the potential profit is limited. This strategy is suitable for bearish market conditions.
- Iron Condor: This strategy involves purchasing a call option and a put option at a higher and lower strike price, respectively, and selling a call option and a put option at two middle strike prices. This creates a range within which the price of the underlying asset must remain for the trader to profit. This strategy is suitable for sideways or range-bound market conditions.
To be a master of Crypto Options trading and for detailed information about them, click here.
Let’s get on to the main part – the mistakes. The following are some of the most common mistakes traders should know about while trading Crypto Options. Let’s check them out!
5 Mistakes to avoid in Crypto Options trading
Mistake 1: Buying Options without thinking of how volatile the market is.
One of the common mistakes in Options trading is purchasing Options without taking market volatility into account. The pricing of Options is based on implied volatility, which is unpredictable as it depends on future market volatility. Therefore, Options may sometimes be overpriced. Even if the trader’s directional assumption is correct, they could still incur a loss if the market doesn’t move enough to offset the premium paid.
Mistake 2: Selling Options without having a proper risk management plan or hedging
The second mistake in Options trading is relying solely on naked shorting Options, which involves selling Out-Of-The-Money Options without hedging. Although selling Options typically offers a positive expected return, taking a short Options position during highly volatile markets without adequate risk management can lead to substantial losses and even bankruptcy, regardless of the trader’s experience level.
Mistake 3: Having a mindset of “make-it-all-back-in-one-go” or placing too many directional bets
Even experienced Options traders can face significant drawdowns, which can impact their market analysis and lead to emotional decision-making. While it is common for even consistently profitable strategies to experience drawdowns, it is crucial not to hastily switch trading directions from long to short and vice versa when facing unfavorable market conditions. Instead, it may be helpful to take a break from trading, such as taking a vacation to a tropical destination like the Maldives, to refresh and recharge before resuming trading.
Mistake 4: Doubtful to trade long-dated Options
Do not be intimidated from trading long-dated Options by their price.
Long-dated Options perform well for hedging long-term Crypto holdings, despite not being the best strategy to profit from short-term price action.
The shorter the expiration date, the more challenging it gets to control risk.
Rather than looking at the total premium, consider how much the Option will lose each day – and decide if that’s a price worth paying.
Mistake 5: Trying to adopt complex trading strategies
Don’t start running before you know how to walk properly.
You might make your pals jealous by bragging about your 16-legged vol-crush, theta eater Options strategy, but sometimes, less is enough.
Try to convey your views in the simplest way feasible rather than complicating things.
The best plan is to start out simple and gradually get more sophisticated as your knowledge and expertise increase. The cost of slippage (the cost of paying the market price) may increase as you build more legs.
So, this was about the mistakes that you should avoid making while trading Crypto Options. Let’s have a quick overview of the pros and cons of it.
Pros & cons of Crypto Options trading
Pros
- You can utilize leverage to increase your purchasing power and access a greater variety of Crypto assets than when buying outright with a minimal down payment (premium), providing more value for your money.
- While it’s true that timing is crucial, working with Options doesn’t require you to be as exact. You can trade Options contracts for weeks or months in the future to allow yourself enough time to make a profit.
- If low risk and huge profit are what you’re after, then purchasing Options can be your answer – simply ask the lucky trader who, in a matter of minutes, made over 1,300% alone by trading Options.
Cons
- Although buying Options is seen as relatively low-risk, nothing comes for free. The possibility of losing all of your invested capital exists, and the market can be particularly harsh on new traders.
- The majority of strike prices expire OTM with zero value because Options lose value over time.
- While purchasing Options carries little risk, selling Options does not. Trading futures has the same (high) level of risk as selling naked (unhedged) Options.
Conclusion
Crypto Options trading is among the most versatile ways of making money since you can only profit from traditional trading when the market rises. Options trading, however, allows you to profit even while the market is falling. Not to mention that it is a risky venture; therefore, in this blog, we mentioned significant mistakes that you could avoid while trading Crypto Options; also, you should do extensive research before starting trading.
Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.
