After trading for a while in Crypto or the conventional financial market, we feel the necessity to know about our potential profit/ loss in advance so that we can manage our risks accordingly. However, learning is not enough; we must know how to apply certain strategies. Experienced traders employ multiple trading strategies to maximize their returns and minimize risks. Options trading is one of the best strategies to adopt. It guarantees ultimate versatility to maximize all market conditions, may they be volatile or not. There are various Options trading strategies available in the Crypto market that can help you trade better. In this blog, let’s learn about them.

Before we start, let’s have a look at what is Crypto options trading.

Introduction to Crypto options

Like conventional options contracts, Crypto options are financial contracts that provide you the right, but not the obligation, to purchase or sell Cryptos if the price surpasses a particular level within a specific time frame.

There are two primary types of Crypto options that exist; they are call options and put options. A call option provides the holder the right to purchase Cryptos at the strike price upon expiration, whereas a put option allows the holder to sell Crypto at the strike price on the expiration date.

Another option available is to write calls, which can potentially require you to sell Crypto (remember, the right to execute trades always belongs to the holder, and the writer may take on the potential obligation), betting that the price will either decrease or not experience significant volatility.

In contrast, writing put options may obligate you to buy the underlying Crypto. Usually, puts are written hoping that the market price will rise in the future, allowing you to purchase Crypto at a much lower rate than current market prices.

So, this was a basic introduction to the Crypto option. Next, let’s jump on to knowing the strategies by which you can be a master of Crypto options.

5 Crypto options strategy to master

Strategy 1: Covered Call

One of the most common Crypto options trading strategies is the covered call strategy. It involves holding a long position in a particular Crypto and simultaneously selling (writing) call options on that same asset.

The goal of this strategy is to generate income from the premiums received from selling the call options while also protecting the long position in case the price of the underlying Crypto were to decline.

If the price of the underlying Crypto asset rises, the call option may be exercised, and the seller (writer) would be obligated to sell their Crypto at the predetermined strike price. However, since the seller already holds a long position in the Crypto asset, they can sell the asset at the strike price and realize a profit.

On the other hand, if the price of the underlying Crypto asset remains the same or decreases, the option will likely expire worthless, and the seller (writer) will keep the premium received for selling the option.

Strategy 2: Married Put

The married put strategy is a popular Crypto options trading strategy. This strategy involves purchasing a long position in a particular Crypto and simultaneously buying a put option on that same asset.

The goal of this strategy is to protect against potential downside risk while also allowing for potential gains if the price of the underlying asset were to rise.

If the price of the underlying Crypto asset were to decline, the put option would increase in value, offsetting some or all of the losses from the long position. The holder of the put option has the right to sell the underlying Crypto asset at the predetermined strike price, regardless of the market price, effectively limiting the downside risk.

On the other hand, if the price of the underlying Crypto asset were to rise, the long position would generate a profit, and the put option holder could simply let it expire worthless, losing only the premium paid for the option.

Strategy 3: Bull Call Spread

The bull call spread is a Crypto options trading strategy that can be used to make a profit from a bullish price movement while limiting potential losses.

It involves purchasing a call option at a lower strike price and simultaneously selling one at a higher strike price on the same underlying Crypto asset. This strategy aims to profit from a price increase in the underlying asset while reducing the cost of buying the call option.

The purchased call option gives the holder the right to buy the underlying Crypto asset at the predetermined strike price, while the sold call option obligates the seller (writer) to sell the underlying asset at the higher strike price. This way, the potential profit from the price increase is limited to the difference between the two strike prices, while the cost of buying the call option is reduced by the premium received from selling the call option.

If the price of the underlying Crypto asset were to increase above the higher strike price, both options would be in the money, and the holder could exercise the purchased call option and buy the underlying asset at the lower strike price. The sold call option would expire worthless, and the premium received for selling the option would be profit.

On the other hand, if the underlying Crypto asset’s price remained below the lower strike price, both options would expire worthless, and the holder would lose the premium paid for the purchased call option. However, the losses would be limited to the premium paid for the option, which is typically less than the potential losses from holding a long position in the underlying asset.

Strategy 4: Long Straddle

The long-straddle is a Crypto options trading strategy that involves buying a call option & a put option on the same underlying Crypto asset at the same strike price and expiration date. This strategy aims to profit from a significant price movement in either direction while limiting potential losses if the price remains relatively stable.

If the price of the underlying Crypto asset were to increase above the strike price, the holder of the call option could exercise the option and buy the underlying asset at the strike price, while the put option would expire worthless. On the other hand, if the price were to decrease below the strike price, the put option holder could exercise the option and sell the underlying asset at the strike price, while the call option would expire worthless. In either case, the potential profit would be unlimited.

However, if the underlying Crypto asset’s price remained relatively stable, both options would expire worthless, and the holder would lose the premium paid for the options. Nonetheless, the potential losses from this strategy are limited to the premium paid for the options, which is typically less than the potential losses from holding a long position in the underlying asset.

Strategy 5: Protective Collar

The protective collar Crypto options trading strategy involves buying a put option to protect against potential downside risk and selling a call option to finance the cost of the put option. Both options are on the same underlying Crypto asset with the same expiration date. Still, the strike price of the put option is lower than the present market price of the asset, and the strike price of the call option is higher than the current market price.

The idea behind this strategy is to limit potential losses if the underlying Crypto asset price were to decrease while also generating income from the sale of the call option. The put option provides the holder the right to sell the underlying asset at the predetermined strike price, while the sold call option obligates the seller (writer) to sell the underlying asset at the higher strike price if the price were to increase.

If the price of the underlying Crypto asset were to decrease below the strike price of the put option, the holder could exercise the option and sell the underlying asset at a higher market price. The sold call option would expire worthless, and the premium received for selling the call option would help offset the potential losses. If the price were to increase above the strike price of the call option, the long position holder could sell the underlying asset at the higher strike price and limit their potential losses.

On the other hand, if the underlying Crypto asset’s price remained stable, both options would expire worthless, and the holder would lose the premium paid for the put option. However, the losses would be limited to the premium paid for the option, which is typically less than the potential losses from holding a long position in the underlying asset.

Bottom line

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, so you should do extensive research before beginning.

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.