Warren Buffett said in one of his famous quotes, “Be fearful when others are greedy, and be greedy when others are afraid”. Sometimes, we become so cautious about our investments that we don’t take actions that could potentially change our lives. When it comes to buying and selling, every investor knows that in order to get the most out of the sale, they need to buy at a relatively low price.
Unfortunately, this doesn’t happen every time you see a drop in market prices; Most of the times, market price fluctuations can confuse you so much that in an effort to minimize risk, you end up with a lot of indecision. Sometimes you may have to wait a long time for your idle capital as you wait for your desirable buy order to be filled.
What you may not realize is that you can earn a steady revenue stream while you wait by trading on options. Buffett once made $7.5 million in 5 minutes using this same strategy. Hence, the question arises, what is options trading and how can you leverage it to reduce risk and earn more profit?
options trading explained
For a start, options are a system of trading that involves the buying and selling of assets, securities or derivatives within a specified period of time. This means that within a specific period, you will be able to buy and sell at a certain price within the same period regardless of the current market prices.
According to this definition, three elements make up an options trade:
- Option Type (Buy or Sell Option)
- a fixed price (or strike price)
- agreed period (after which the option expires).
For an options trade agreement to proceed, you as a trader (either buyer or seller) must pay a certain amount to secure the option. Known as the premium, it is only a fraction of your trading capital.
Within the term of this option agreement, you may or may not be able to exercise the option depending on favorable market conditions. If you decide not to exercise the option, it will expire at the end of the time period and your loss will be only the premium amount. In this case the loss is only a fraction of the amount you could have lost if you were trading straight.
There are two examples of options trading:
1. Put Options
Buying this type of option simply means that you have an asset that you want to sell. If you expect market prices to fall and you fear that the value of your property will drop drastically within this period, then this option is for you.
For example, let’s say that the price of bitcoin is $35,000 and David has 1 bitcoin that he is willing to sell for the same amount, but he fears the price will drop in the coming month, he wants to initiate an options contract. may decide to pay the premium for 1 June to 1 July. Therefore he will set the strike price at $35,000 for the duration of this contract.
If at the end of April, the price of bitcoin drops to around $28,000, David may decide to exercise this contract by surrendering the collateral (which he owns 1 bitcoin). Once this is done, he gets $35,000 instead of $28,000, which would have turned into a loss of $7,000 if he traded straight.
Conversely, if the price of bitcoin rises to around $43,000 during this period, David may decide not to exercise this contract to sell his bitcoin short. In this case, he forfeits the contract and loses only a fraction of his capital which is the amount paid for the premium.
2. Call Option
This category of options trading marks you as a buyer. After you get the call option, you have to decide how much of the asset you will buy and specify the period after which it will expire.
Taking David once again as an example, let’s say that on June 1 he decided to buy a call option for 1 bitcoin at a specified price of $35,000 because he expected the price to rise. He consequently pays the premium fee and sets the contract to expire on July 1.
If the sale of bitcoin starts at $43,000 at the end of June, he may decide to exercise the call option by depositing the required collateral which in this case is a strike price of $35,000. This way, he saves up to $8,000 that he could have spent if he had decided to buy bitcoin at a later date.
However, assuming the price of bitcoin drops to $28,000, he may decide not to exercise the call option and in this case he will only lose the amount of the premium paid, reducing risk in the process. Will do
Call options are generally good for bullish traders who expect the market price to move up.
Where can you trade options?
Options trading is available at hedge platform. Since their foray into the DeFi space, the platform has brought amazing use cases for trading options. In addition to the options trading examples and digital settlement listed above, they also offer cash collateralization and settlement opportunities.
The platform ranks among the first movers and market leaders of bitcoin and cryptocurrency put and call options. Binance operates on both Smart Chain and Ethereum, they are currently tuning their platform and preparing to crank up options liquidity through their strategic partners.
Trading options on Hedget is as easy as it gets, all you have to do is visit their website https://www.hedge.com And find out how you can enhance your crypto trading toolkit with techniques like options trading above.
Image by Sergei Tokmakov, Esq.