Analogy: "Crypto options trading is like playing a game of poker. Just like in poker, you need to assess the probability of different outcomes and decide which options to bet on.
There is a certain amount of risk involved, as the value of your bets can go up or down based on market movements.
However, with careful analysis and strategic decision-making, you can increase your chances of coming out ahead in the long run.
Just like in poker, it's important to manage your risk and not bet more than you can afford to lose."
Trading crypto on an exchange can be simple and rewarding. But veteran investors and those involved in traditional markets may still want more.
Crypto options trading is one such avenue that expands investment opportunities. They are another financial instrument or "derivatives" that give investors more means to grow their money.
So, what exactly is crypto options trading?
Crypto Options Trading
Options are an asset class that offers several advantages that individual ETFs and stocks alone cannot provide if appropriately used. They are known as Derivative asset classes because their value is derived from an underlying asset. This could be stocks, ETFs, indexes, and more.
Underlying assets include bonds, currency, interest rates, market indices, and futures contracts. Though called derivatives, Options are also securities themselves, like a stock or bond. They are just a little more unique.
Let us find out why:
Options are contracts that give the purchaser the right, but not the obligation, to buy or sell a security, such as a stock or exchange-traded fund, at a fixed price within a specific period.
Each options contract represents 100 shares of the underlying stock.
In short, a call option gives the buyer the right, but not the obligation, to buy the underlying asset at a fixed price (also known as the "strike price") at the options expiration date. A put option gives the seller the right, but not the obligation, to sell a stock at a specific price.
Options are compelling tools that help us enhance our portfolios. They achieve this through hedge protection, leverage, and income-bearing strategies. Regardless of an investor or trader's situation, there is almost always an option strategy to help optimize your portfolio.
How Do Options Work?
Putting a value on options contracts is basically about determining future price movement and the probability of that move occurring. The more likely an event is to occur, the more expensive an option that benefits from that event would be.
For instance, a call options value goes up as the price of the stock (also known as the underlying asset) increases. This statement is the key to understanding the relative value of options.
In keeping in mind that time is money in options trading, the less time there is until an options expiry date, the less value the option will have.
This is due to the chances of the stock's price moving in your favor being incrementally lowered as we approach expiry.
An option is a wasting asset. This means it has a limited lifespan and irreversibly declines in value over time.
Example: If you buy a one-week option out of the money, and the underlying stock doesn't move, the option becomes less valuable with each day passing.
Due to time being a component of an option's price, a three-month option will be worth less than a six-month option. Accordingly, the same strike price for a one-year expiration date will cost much more than the same strike price for a one-month option.
The wasting feature of options mechanics is a result of time decay. Time decay is also called "Theta." The same option will be worth less tomorrow than today if the stock price does not move.
Volatility is another factor that increases the price of an option. This is because uncertainty smoothens the odds for us. In this case, if the volatility of the underlying asset increases, more significant price swings occur, increasing the possibilities of meaningful moves up and down.
Final Thoughts
Options trading is a lucrative opportunity to diversify your portfolio and manage risk in uncertain markets. It expands the crypto market to include more features of traditional finance and attracts more traders.
But it can also be risky and lead to massive losses if you are not careful with your investments. Doing your research and considering the pros and cons before investing your money is essential.
