Strike Price In Crypto Options

What is the strike price in crypto options?

The strike price is one of the basic concepts you need to be aware of before you enter the crypto options market. As you might be aware, a crypto option is a derivative contract which allows the buyer to buy or sell the underlying crypto at a specific price upon a fixed point in time in the future, known as the expiration date of the contract. Now, this aforementioned specific price is what we call the strike price of a crypto options contract. Simply put, the strike price of a crypto option is the value at which a put or call option can be exercised. As an investor, picking the strike price is one of the integral decisions you must make when buying a crypto option, since it will heavily affect the outcome of your investment. Let’s see an example of how a crypto option’s strike price may directly decide your profit or loss. Let’s say investor X wants to buy a call option for a crypto currently trading at $10 and is available at a strike price of $8. This implies the seller of the contract believes that the value of the crypto will decrease in the future, so they’re avoiding any big losses by selling the options contract at the strike price of $8.This strike price of $8 decided by the seller, of course, is the cost at which the underlying crypto will be sold once the crypto options contract expires. However, this investor X did their research and believes the crypto’s price will go up in the coming times. Suppose they expect the crypto’s value to go up to $15.Now, say the market for the crypto actually goes up and it is valued at $12. In this case, X will profit when they buy the crypto at the price of $8 after the options contract expires. On the other hand, if the market goes down and the crypto price becomes $6, the seller will be profiting and X will have to bear a loss.

Strike price of call and put crypto options

For a call option, a buyer has the right (but not the obligation) to buy the underlying crypto at the strike price on a fixed date. At the time of expiry, if the strike price is above the spot price, the buyer suffers a loss. On the other hand, if the strike price is below the spot price at expiry, the buyer profits. In the case of a put option, the trader has the right to sell a crypto at the strike price on the expiration date. However, a put option lets the trader sell the crypto even before the date of expiry, unlike a call option. So with a put option, when the strike price of the crypto is above the spot price, the buyer profits. But if the strike price is lower than the spot price, the seller profits.

What are the three types of strike prices?

Options are divided into three categories based on whether the strike prices fall above, below, or equal to the present market price of the underlying crypto. However, since the spot prices keep changing, a crypto option can change categories at different points in time. Here are the three types:

• ITM or In the Money Strike Prices: Depending on whether an option is put or call, if the strike price of an option is so that a buyer can exercise the option for more or less than the current spot price of the crypto, it’s an ITM option. If it’s a call option, the strike price being below the spot price makes the option an ITM one, since the holder can exercise it by buying the underlying crypto for less than its market value at the moment. On the flip side, for a put option, it’s ITM if the strike price is over the spot value, since the holder can exercise it by selling the underlying crypto for more than its current market price.
• ATM or At the Money Strike Prices: If the strike price of a crypto option is equal to its spot price, the option is considered to be an ATM one.
• OTM or Out of the Money Strike Prices: If the strike price of a crypto option is so that it does not have any intrinsic value, as in the strike price is higher than the market value for a call option or lower than the spot price for a put option, it is an OTM option. Buyers who don’t mind high risks may choose to hold an OTM option, hoping for the spot price to change in their favor before the expiry date.

What are some factors to consider while choosing the strike price for a crypto options contract?

Here are some factors you must consider before you set the strike price for a crypto options contract you’re interested in:

• Risk Tolerance: Your risk appetite is a very important factor when deciding the strike price for a crypto option. Again, the three aforementioned types of options contracts come with different risk levels. For instance, the ITM option will go well with an options buyer, while the OTM kind will pair up well with an options seller.
• Risk-Reward Payoff: This is related to the risk tolerance factor. If your risk tolerance is high, you can go for an OTM option. But if you can’t afford to take that big of a risk, an ITM or ATM option would work better.
• Implied Volatility: Every crypto has different volatility levels, constantly impacted by things like trader emotions, government policies, and various other factors. These price fluctuations are important to consider when setting the strike price for a crypto option.
• Liquidity of a Crypto: The liquidity of a crypto will help you decide the profitability of a crypto options trade. Indeed, if the crypto has high liquidity, you can hope for better profits when you exit the trade.

Differences between strike price, spot price, market price, and exercise price

As a newcomer to the crypto options market, it might get a bit difficult to differentiate between the strike price, spot price, market price, and exercise price of an option. To clear up things, here’s a table with the clear definitions of these terms laid out side by side:

How does the strike price affect the value of a crypto options contract?

As mentioned before, the strike price of a crypto options contract is one of the most important factors when it comes to the value of said contract. The lower the strike price of a call option, the more valuable it is. Similarly, the higher the strike price of a put option, the more valuable it proves to be. If you are interested in trading crypto options, we do hope this post helps you grasp the concept of an option’s strike price. To trade crypto options, do give our website a visit!

FAQs

Q. What is the difference between strike price and spot price?
The spot price of a cryptocurrency is its current market value. However, the strike price of a crypto options contract is the price at which an investor may buy or sell the underlying crypto at the contract’s expiry.

Q. How to choose the best strike price?
There can be no set strike prices for crypto options that will guarantee you profits. Based on your risk appetite, you can choose options whose strike prices are close to the underlying crypto’s spot price (less risky) or those with strike prices farther from the crypto’s spot price (high risk).