The financial world can be full of jargon that may overwhelm a novice at first glance. The complicated terms and unheard words might induce fear and keep you at bay. But there is absolutely no need to worry. The underlying concepts are much easier to understand and partake. One such popular jargon is ‘options trading.’ In this post, we hope to offer you satisfactory answers to questions like What is a cryptocurrency option? And what is options trading?
Let’s get started.
Options are a type of derivatives contract. Now, what are derivative contracts? Derivative contracts derive their value from an underlying asset like equity, real estate, or other. Since here we are considering cryptocurrency options, the underlying asset in consideration is a cryptocurrency.
Cryptocurrency options give the holder ‘the right but not an obligation’ to either sell or buy a cryptocurrency at a pre-agreed price on or before a set date. Now there are two types of options, call option and put option:
The strike price is nothing but the predefined price of the cryptocurrency set while formulating the options contract. The day when the holder decides to execute the option is called the trade date. Also, the day at which the option is finalized is the delivery/settlement date.
Let’s check out the meanings of other terms associated with options trading.
Premium: This is the price you pay to own an option. In other words, it’s the price of the contract. The premium is influenced by all the factors associated with the options contract – the underlying asset, its future potential, etc.
Maturity: It is the last date by which an option needs to be exercised (call or put) before it expires.
Now, how can trading options be an advantageous sport for the discerning crypto trader?
Say you purchase a put option at a certain price. Now, suppose the price of the underlying cryptocurrency falls. Now a put option will give a right to you – the holder – to sell the cryptocurrency at the already predetermined price, dodging any losses.
Similarly, suppose the price of the underlying cryptocurrency shoots up. Now a call option would have given the right to the holder to buy the cryptocurrency at an already predetermined price, which would be lower than the existing price in this case. The holder will make a remunerative profit on the trade.
Cryptocurrency options can be bought from a cryptocurrency derivatives exchange. These exchanges will charge you a certain fee on the trade made. Also, you will be subjected to certain limits applied by the exchanges.
Another medium from where you can buy crypto options is through a publicly regulated exchange. These exchanges, unlike cryptocurrencies, work under the regulation of an overseeing body.
Options strategies are designed in such a way that an investor either makes a profit on the volatility of the underlying asset or hedges this risk. Let’s check out a few popular options strategies, with images courtesy of the very reliable and high-quality Investopedia.
Crypto options trading remains an unexplored segment owing to its often mistaken complexity. But now you know how simple trading crypto options are, when are you getting started?
Stay Connected With News, Updates And More