If you think prices will move down, and you want to short the market but worry about forced liquidations or do not want to deploy your full capital, you can still participate in the market movements by buying a Put option.
Why buy Put?
Unlike spot trading which requires full collateral, buying a Put option allows you to participate in the movement of an underlying asset for a relatively small price (Premium Payable).
This removes the risk of liquidation (which is why it makes sense to buy Put rather than short the market) while allowing you to enjoy leveraged returns.
Example
- You are bearish on BTC and expect it to trade below $4,000 on 26 June 2020
- You can buy a Put for 1 BTC with Strike Price at $4,000, Settlement Date on 26 June 2020
- The cost for making this position will be 714.33 SP$ (Premium Payable)
How do I profit?
- In order to profit from your buy Put, BTC will have to trade below your Breakeven Price at Settlement Date
- Breakeven Price is calculated as [Strike Price — Premium Payable]
- In this scenario, Breakeven Price will be $3,285.67 (4,000–714.33)
- The lower BTC trades below your Breakeven Price at $3,285.67, the greater your profit. Depending on how much BTC dips, your profit could be many times more than your Premium Payable
- However, if BTC trades above $3,285.67, your maximum loss would be 714.33 SP$ (Premium Payable), no matter how high BTC rises
Learn more about how you can profit from options in any market conditions:
- Shorting got you REKT? Try Put options.
- 3 strategies to combat crypto market volatility with options trading
- Buying a Crypto Option Contract
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