Cryptocurrency derivatives are exceptional financial instruments to invest in, for a wide variety of reasons, regardless of whether the underlying crypto is bullish or bearish. Crypto options, in particular, act as a wonderful hedge, balancing the volatile nature of cryptocurrencies, while also offering opportunities to speculate for those looking to profit from the volatility.
Taking advantage of crypto options and implementing specific strategies, taking into account your goals for trading crypto options, can take your derivatives game to the next level.
Let’s take a look at 5 such strategies, and how you can master crypto options trading.
Cryptocurrency options are a type of financial derivatives, that gives the holder the right, but not the obligation to sell or buy the underlying cryptocurrency at a specific price at a specific time.
There are two broad types of crypto options – call options and put options. Call options give the holder the right to buy cryptos at the strike place on expiry, while put allows the holder to sell crypto at the strike price at the date of expiry.
Alternatively, you could also choose to write calls, which may give you the obligation to sell crypto (remember, the right to execute trades remains with the holder – the writer takes on a potential obligation), betting that the price would either fall or not subject to much volatility.
On the other hand, writing put options potentially gives you the obligation to buy the underlying crypto. Usually, puts are written in the hope that the market price would increase in the future, enabling you to buy crypto at a much lower price than the market rates.
Now that we have the basics covered, let’s take a look at some of the most commonly used crypto trading strategies used for different purposes.
The covered call is one of the most commonly used strategies in options trading. The covered call, also called the buy-write strategy, is an effective strategy to earn a premium in a predictable market.
The strategy is fairly simple – you purchase or hold the underlying cryptocurrency, and write (sell) call options on the very same crypto that you hold. The benefits of this strategy were explained in detail in the post titled “Yield farming through options”.
The married put is another hedging strategy that allows the holder to exit their long position in case of a rapid decline in prices. Instead of writing calls, like in covered calls, the holder buys a put option instead.
However, instead of gaining a premium by selling covered calls, you pay a premium for the option to exit a long position. This effectively means that the investor will lose the amount of premium paid, in case the value of the crypto doesn’t fall.
Bull Call Spread
The bull call spread is a type of vertical spread strategy, used when a trader has a bullish perspective on the underlying crypto. This strategy is effected by buying calls at a specific strike price, while selling the same number of calls at a higher strike price, betting on an increase in underlying value.
By utilizing this strategy, though the trader limits their profits in case their predictions are right, they also limit their net premium spent, as purchasing naked calls tend to be expensive.
When a trader believes that a significant price change is on the cards, but is unsure of the direction of the price change, he opts for a Long straddle. In a long straddle, the trader buys calls and put options on the same asset, with the same strike price, and expiration date.
This theoretically allows infinite gains, while limiting the losses to the cost of both the options combined. In a long straddle, the trader doesn’t care whether the move is bullish or bearish, only that the movement is significant enough to cover the costs.
In the case of a protective collar, you limit both the upside and the downside of a potential price movement and can be a cost-efficient way to hedge against a negative price movement. In this strategy, you buy a married put, along with selling a covered call, effectively buying an insurance policy against a negative price movement at 0 costs.
The trade-off is the fact that you won’t be able to participate in profits beyond the strike point, as you’d be obligated to honor the call. The maximum loss is limited to the price difference between the put and the call options.
Think You Can Be A Master of Options?
If you think you are an expert at trading in options, preferably with a proven track record, contact us! Selected traders will be given $1000 in trading credits for trading in options, and the profits are theirs to keep. You will be required to share at least 3 detailed tweet threads per week, discussing in detail your trades, charts, PNL cards, and your reasoning behind such trades.
If we believe that the trader is consistently performing well, they stand a chance to get higher trading credits. Even if you’re not experienced, you can refer your friend, and if they end up getting selected, you gain $100 as a referral reward. Refer here for more details.