OKEx Options 101
Learn the basics of options trading, key terms, and benefits
Derivatives trading is on the rise in the crypto space as a popular hedging and arbitrage tool for professional traders. If you are tempted to dive into this lucrative market and hope to learn more about the basic concepts, key terms, and benefits of options trading, you have come to the right place.
As we are launching OKEx Options soon, we have prepared this article for you to grasp all the basics about options. Don’t miss out the quiz* at the end, as you can win rewards for getting all correct answers!
*Period: Dec 12–19, 2019 (UTC)
What are options?
Options are contracts that give buyers the right, but not an obligation, to buy or sell an underlying asset at a pre-determined price within a specific period.
There are only two types of options, namely, call option and put option.
When you expect the price of an underlying asset will rise, buy a call option. After the price goes up, you can buy the asset at your pre-determined price, which is lower than the market price.
On the contrary, if you expect the price will drop, buy a put option. After the price goes down, you can sell your asset at your pre-determined price, which is higher than the market price.
When a buyer wants to exercise an option within the period, the seller must sell it to the buyer. And when the buyer chooses not to exercise it, the seller does not need to pay anything in this case.
We will explain all the key terms of options trading below.
Key terms in options trading:
Underlying asset: An asset for trading on which a derivative is based, covering commodities, financial assets, interest rates, and composite indices. The underlying asset of Bitcoin options is the BTC/USD index.
Call option: It gives the holder the right to buy an asset at a pre-determined price within a specific period.
Put option: It gives the holder the right to sell an asset at a pre-determined price within a specific period.
Expiration date: The date on which an option expires.
Option premium: The price paid by the buyer for an option contract. It increases as the market volatility increases.
Exercise price (or strike price): The price at which the buyer can buy or sell an underlying asset when exercising a call or put option respectively.
European Option: A type of contract that can only be exercised on its expiration date. (OKEx Options are European options).
American Option: A type of contract that can be exercised at any time before its expiration date.
Partial liquidation: No margin is required for buyers to hold a long position. Thus, partial liquidation will not occur due to the short of margin. Only the options sellers have to pay a margin due to their obligation to fulfill a contract. When a seller’s account balance drops below the maintenance margin level because of market volatility, partial liquidation will be triggered.
Contract naming: Every options contract is named in order of “underlying asset — expiry date — exercise price — contract type(call/put)”. For example, “BTCUSD-190830–10000-C” means that this is a BTC options contract expiring on Aug 30, 2019, with a strike price of USD10,000 and it is a call option.
How to trade OKEx options?
The OKEx BTC/USD options contract is settled in BTC (and more cryptocurrency underlying contracts will arrive soon). Each options contract’s face value is 0.1 BTC.
To get started, traders can either:
- Pay an option premium to buy a call or put option — to lock in the prices for buying or selling the underlying asset upon the expiry of the options contract; or
- Sell an option contract — to earn the options premium immediately and to fulfill the obligation to buy or sell the agreed number of the underlying assets at fixed prices upon the expiry date.
Both the buyer and the seller can close the open positions and free their rights and obligations in advance. The profits of closed options positions can be transferred out after daily settlement.
Benefits of options trading
Trading options add more values to your overall investment portfolio and allows you to enjoy the following benefits:
Options provide leverage. Traders can buy a similar value of the underlying asset with a much fewer fund when compared to buying it on the spot market.
- Reduced Risk
As buyers do not have to pay any position margin, the maximum loss of option buyers is the option premium. Also, it can help reduce risk exposure in the spot market by hedging against fluctuations of underlying assets prices.
- More flexible
When investors are not 100% sure about the future trend of the crypto market, they can first allocate a small amount of funds to buy an option contract, which only involves little risk.
There are four kinds of strategies you can execute in options trading, including long call, long put, short call, and short put. Investors can trade options based on the movement of underlying assets, as well as the time and volatility, earning more returns with different investment strategies.
Basics of OKEx Options (take BTC/USD options as an example):
Test yourself with your options knowledge and get rewarded now!
Are you ready? Stand a chance to win 10 USDK! Don’t worry if you are unsure about the answers, just go back to the article and you will find them all there.
We will draw 10 lucky users who answer all questions correctly to give away 10 USDK each. This quiz is open to OKEx registered users only. You’ll have to fill in your OKEx account EMAIL at the end of the quiz.
If you haven’t joined us yet, here’s your chance: http://bit.ly/OKExOptionsQuiz1
Click to start the quiz. Good luck!
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.
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