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Unlike traditional options that grant the right to purchase or sell an asset at a later point, Crypto Options are derivative products that enable trading on the price movements of the fundamental crypto asset without the need actually to possess the crypto asset.
Based on where it was trading when the Crypto Option contract was activated, you will either win or lose money when trading Crypto Options that is based on the difference between the starting and closing price of the position. Let’s learn more about this exciting concept in this blog!
Crypto Options trading: The definition
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 is essentially a means to lower 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.
Important key terms related to Options trading
- Call Option: A contract that traders purchase when they have faith in the future value of cryptos.
- Put Option: A contract that enables buyers to sell cryptos even if the current price is lesser than the strike price.
- Strike Price: The cost at which traders purchase or dispose of the underlying assets.
- Premium: The sum that the buyer of the options has paid.
- Maturity: The maturity of the option is its expiration date.
- Delivery Date: The day the option is executed, completed, settled, or delivered.
- Trade Date: The date on which the trader decides to exercise his option, and the option is executed on the market.
Let’s have a look at some of the best Crypto Options strategies that are followed by investors.
Different Crypto Options trading strategies
- Covered Calls
You can use the options strategy known as a covered call to sell call options on securities you already own in order to generate money. The call options you sell will have a strike price and an expiration date that you specify.
You will still profit because you sold the option for more than the strike price, even if the securities price increases and the call buyer exercises their option to buy your securities at the strike price. You will still profit from the option premium you received even if the securities price drops.
- Naked Puts
Selling put options on securities without possessing the underlying securities is known as a “naked put” options strategy. This is a bullish technique because you are wagering that the securities price will increase.
If the securities price does increase, the put option will expire void, and you can keep the premium. You might be assigned and compelled to buy the securities at the strike price if the securities price declines, but you will still benefit from the premium you paid.
- Bull Call Spread
You buy call options in a bull call spread and later sell them at a better strike price. This is a bullish tactic since you are betting the securities price will rise.
The call options you sold will expire worthless if the securities price rises, and you will keep the profit from the spread between the strike prices. Conversely, if the securities price falls, you can lose money on the call options you purchased, but you’ll still make a profit on the call options you sold.
- Bear Put Spread
You buy put options and then sell them at a reduced strike price when executing a bear put spread. This is a bearish strategy since you are betting that the securities price will decrease.
If the securities price does fall, the put options you sold will expire and be worthless, and you will keep the profit from the spread between the strike prices. Conversely, if the securities price rises, you might lose money on the call options you bought, but you’ll still profit if you sell the put options you did.
- Iron Condor
The iron condor options strategy is selling call and put options with varying strike prices. This is a neutral approach where you wager that the securities price will stay within a specific range. If it remains within the range, both the call and put options you sold will expire and be worthless, and you will keep the premiums as profit.
If the securities price changes outside the range, you can lose money on the options you sold, but you’ll still gain money on the options you bought.
Bottom line
Trading Crypto Options can be dangerous on top of the unpredictable crypto market. Liquidation is a significant source of risk in trading on margin, mainly. So be very sure to educate yourself and trade sensibly, aware of the potential losses.
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.
