Trading and selling crypto tokens on an exchange can be rewarding. But many investors, especially from the traditional markets, are still looking for more investment options. One such avenue is crypto options trading. Crypto options are another financial instrument that offers investors a means to grow their wealth.
What is crypto options trading?
A financial agreement that enables you to buy or sell an asset at a predetermined price is known as an option contract. Unlike futures contracts, users have the option of exercising them or not. Users are not obligated to fulfil the contract.
This type of contract has made its way into the crypto world recently. Options can help reduce the risk, especially for crypto investors in a volatile market.
How does options trading work?
Some prominent features of a crypto option contract are the premium, strike price, and expiry date. Premium is the cost to buy the crypto contract. The price at which the contract owner has the right to buy or sell the underlying asset is the strike price. Lastly, the final settlement date of the contract is called the expiry date.
There are two types of options, namely, American and European. American options can be exercised at any time before the expiry date, whereas European options can only be exercised on the settlement date.
Many factors determine the premium of a contract, such as the remaining duration, the price of the underlying asset, the expected return, and the expected volatility between the start and end dates of the contract.
Types of options contracts
Call option
The right to buy the underlying asset at a specific price is known as the call option. Users enter into this contract if they believe the strike price will be lower than the market price on the expiry date. This option enables users to purchase the asset at a price lower than the current rate.
For example, you want to buy an Ethereum call option expiring in six days. This option has a strike price of $1150 with a premium of $40. If the price of ETH rises from $1150 to $1250, then you can choose to exercise the option and buy ETH at the strike price. This will give you a profit of $60, which is subtracting the strike price and the premium from the current price.
Put option
The right to sell an asset at a predetermined price is known as a put option. Users choose this option contract when the strike price is higher than the market price. So they can sell their crypto at a higher price than the market rate.
Consider that you want to buy an Eth put option. Just like in the example above, the premium is at $40 and the strike price is at $1150. If the price of Ethereum falls from $1150 to $1050, you exercise the option to make a profit. You can make a profit of $60.
How to trade crypto options?
Option trading begins when a user creates a call or put option. The contract will have a strike price and an expiration date. The contract is then listed on a crypto exchange that has options trading. The buyer can choose to trade it or exercise the option.
Users must open an account on an exchange that supports options trading. Next, they deposit their funds and can immediately start trading options.
What are some crypto options strategies?
Bull market
Prices of most assets trend upward in a bull market. In this scenario, buying call options is the best method to earn profits. The advantage of call options is that you can limit your risks as you are not obligated to exercise them even if the price fails to rise.
Bear market
Most asset prices fall in a bear market. A put option is the best method to invest in this scenario. This method allows you to sell at a higher price and earn a profit even if market prices trend downward.
Is crypto options trading different from traditional options trading?
Time and market volatility are two main factors that separate a traditional market from a crypto market.
Global financial markets are usually open from Monday to Friday between 9 a.m. and 5 p.m. You can only make trades during this window. If an investor makes a trade at night or on the weekend, the order will only be processed on the next trading day. The crypto market operates around the clock and all year. There is no downtime in trading crypto.
The crypto market is more volatile than traditional markets, leading to higher profits but the risk is also higher. Traditional markets are more stable, comparatively.
Benefits of crypto options
- Risk Management: The risk factor is the main advantage of options over ownership or futures contracts. You can choose to not exercise the contract if the market does not move in the right direction. You will only lose the premium, not the entire investment amount.
- Liquidity: Compared to standard crypto markets, derivative markets have high demand and are more liquid. These benefits make it easier and faster to complete trades.
Risks of crypto options trading
- High risk: The premium of an options contract can sometimes move 90–100% in a single day. This volatility makes it risky for users to invest heavily in the options market.
- Regulation: The regulations in the crypto industry are still largely under development. You will get no government protection if you get scammed by a fake platform.
Conclusion
Options trading is a great opportunity for investors to diversify their portfolios. It enables the crypto market to include features of traditional finance, which in turn can attract more investors. It can be risky and lead to losses if you are not careful about your investments. It is vital to do your due diligence and research the pros and cons before investing in the options market.
Learn more about crypto trading on ZebPay blogs. You can now trade more than 100 cryptos using ZebPay, India’s oldest crypto exchange.
Disclaimer: Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. Each investor must do his/her own research or seek independent advice if necessary before initiating any transactions in crypto products and NFTs. The views, thoughts, and opinions expressed in the article belong solely to the author, and not to ZebPay or the author’s employer or other groups or individuals. ZebPay shall not be held liable for any acts or omissions, or losses incurred by the investors. ZebPay has not received any compensation in cash or kind for the above article and the article is provided “as is”, with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.
