Bitcoin options — An introduction
By Sparrow on The Capital
Options are a type of financial derivatives, whose value is derived from other underlying assets. The underlying asset could be cryptocurrencies, stocks, interest rates, commodities, etc.
Specifically, an option is an agreement between two parties that gives the buyer of the option the right to trade an underlying asset at an agreed price on an agreed date. For options, there will always be two parties involved — “Buyer” and “Seller.”
The buyer pays the seller a non-refundable premium at the start of the contract.
The buyer can choose not to use the option if it’s not in his favor.
The seller is required to fulfill the terms of the contract if the buyer exercises his rights.
Types of options
There are two types of options — call option and put option.
Call option: If you are bullish on the market and expect the price of an underlying asset to rise, you can buy a call option.
After the price goes up, as the buyer of the call option (right to buy), you can buy the asset at your pre-determined strike price, which is lower than the market price.
Put option: If you are bearish on the market and expect the price of an underlying asset to fall, you can buy a put option.
After the price goes down, as the buyer of the put option (right to sell), you can sell the asset at your pre-determined strike price, which is higher than the market price.
In all option contracts, the seller is required to fulfill the terms of the contract (obligation to sell or buy) as he was paid a premium already.
Benefits of options
As one of the most flexible derivative instruments, options can help to boost and protect your volatile crypto portfolio. Here are some benefits.
- Enjoy limited risks and potentially unlimited returns
Through buying options, you can trade BTC volatility for a relatively small price (Premium Payable) while enjoying uncapped leveraged returns, depending on how much BTC price fluctuates.
2. Earn income even in sideways markets
You can also sell options to earn from the instant, non-refundable Premium Receivable should the option settles Out-The-Money.
3. Versatile trading tool; trade multiple strategies
Depending on your risk appetite, you can engage in different options strategies to boost or protect your portfolio.
Learn more about options here:
- Boosting your trades with crypto options
- Make your crypto assets work for you — Sell options for weekly income
- Buy crypto options to enjoy leveraged returns
- 3 smart ways to bet on the upcoming bitcoin halvening with options
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