Crypto Options Trading Strategies for Beginners | Introductory Options Trading Strategies

Traditionally, the options market allowed long-term investors and traders to offset their portfolios and positions opened in other forms of derivatives contracts like futures or while trading spot markets. Crypto options offer the same possibilities. These derivatives contracts give market participants the right but not the obligation to exercise a put or call option.

What Is Crypto Options Trading?

Essentially, options contracts are a type of long-term and mid-term speculative method, which traders and investors perceive as a relatively less risky procedure when compared to other trading methods.

The unique feature of being able to buy or sell without being obligated to do so often encourages traders to use option contracts as a strategic risk management tool.

Characteristics of Options Contracts

• Strike Price: The price at which each contract buyer has the right to buy or sell while counting a loss or a profit. These prices often determine if an option is in-the-money, out-of-the-money, and at-the-money.
• Expiration Date: The time to expiration for an investor to exercise an option contract. Typically, expiration time determines the option prices.
• Exercise: Refers to the time upon expiry at which options contracts buyers realize their rights to buy or sell the underlying asset. Options buyers are under no obligation to exercise a contract.
• Premium Price: The cost of an option contract (what a buyer has to pay and risk), determined by factors like time to expiration, current asset price, and market volatility.
• Multiplier: The interest rates options contracts perform. It is a form of leverage that multiplies the potential gains (the final profit minus the premium price).

Call Vs. Put: How Options Work

The relevant point in this market is that options sellers (who write contracts) can offer put (down-side) and call (up-side) contracts, and buyers can purchase those contracts. That means buyers can go bearish and sellers can be bullish, or the first can be bullish and the second bearish.  

The sophistication behind the curtains is they are trading rights but not obligations, which means a trader does not buy nor sell an asset directly as in the spot market, and neither must do so as in the futures market.

How is that possible?

Let's define each contract type:

• Call: Buyer's right to buy an underlying crypto.
• Put: Gives buyers the right to sell an underlying crypto.

The dynamic of this market is that options sellers offer a kind of insurance ahead of the market volatility, which is why the premium price exists. In the end, options buyers purchase the possibility to buy or sell an asset upon contract expiry and the chance to dispense with it.

Between the initiation of a contract and the expiration date, the strike price nails the potential profit and loss that vary according to the premium price and a multiplier.

Premium Cost: How Options Determine Prices

The option's premium is what traders risk, and the strike price is what they seek as a potential gain. Intrinsic and extrinsic values are crucial concepts here. The expiration time and volatility are also variables. For example:

• Intrinsic: A trader who wants to buy a call while the strike price is below the current asset's market value (in the money) has to pay a higher premium.
• Extrinsic: A trader who wants to buy a call while the strike price is above the current asset's market value (out of the money) can pay a lower premium.
• Expiration-Time: The longer the date upon expiry, the higher the premium cost.
• The same applies to puts.
• Volatility: The higher or lower the market swings, the more or less expensive the options.

Leverage: Understanding Options Multiplier

Once a trader purchases an option, the P&L calculation performs on a multiplier. For example:

• BTC's price at the start of October was $60,000. A trader believes that by the end of the month, the price will be higher and purchases five call options at a strike price of $64,000 for a 0.001 BTC premium, which expires on October 30.
• 0.001 x 60,000 = 60 x 5 = $300
• Leverage: Each contract gives the right to buy 0.1 BTC at 64,000. Five call options mean a buying power of 5 x 0.1 = 0.5 BTC.

The potential outcomes

1. BTC price reaches 66,000 at the expiration. The calls are in the money, which implies that 66,000 - 64,000 = 2,000 x 0,5 = $1000 profit - $300 premium = $700 total.
2. BTC price is 62,000 at the expiration. The calls are out of the money. The trader loses the premium ($300).

The Basics: Introductory Options Strategies

Two primary strategies can help us understand the potential risks and benefits of crypto options:

• Naked Call And Put Strategy
• Hedging Strategy.

Naked Call And Put Strategy

This method belongs to the options seller. It implies trading options without the hedged position, such as follows:

1. Those who sell a call option go short in the underlying asset.
2. Those who sell a put option go long in the underlying asset.

Hedging Strategy

This approach helps investors and traders protect holdings and future positions, respectively. For example:

1. In the investor's case, the strategy consists of a protective put to offset market downturns affecting a portfolio. Since investors only capitalize when the prices increase, they can pursue gains when the market price declines by purchasing a put option that allows them to sell an asset at a higher price even when the price falls.
2. Swing traders can hedge weekly positions and offset swap commissions by purchasing a call option when they are short in the futures market or a put option when they are long.

Conclusion

Crypto options trading is a sophisticated method that stands out by its risk management capabilities. Traders and investors use call-and-put options contracts to hedge their positions and portfolios in front of market volatility. The options market presents a unique characteristic when rights over underlying assets are the elements traded without the obligation to perform buying or selling decisions upon the expiration of such contracts. Those who sell the rights demand a premium as a consequence.

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