Promising instruments in the world of digital assets: what are cryptocurrency options?

Integrating with the traditional financial market, the cryptocurrency market is developing and becoming more and more popular, adopting the tools of the first one, including futures and options.

Nowadays, cryptocurrency options have not yet gained absolute popularity among traders, though,while experts сonsider this format to be promising.They also note the possibilities of crypto options in the game with price changes, despite the potential difficulties in perception by the market players that can be called as  newcomers. The very concept of cryptocurrency options means the right to sell or buy cryptocurrencies acquired for a certain amount of remuneration at a predetermined price at a certain point in time and within a certain period without obligation.

It is possible to conduct profitable activities of two types using cryptocurrency options: to make a profit from the growth of an asset or income from a fall in its quote. Let us consider in more detail the above mentioned one, as well as other features of cryptocurrency options.

How do options on bitcoin and other cryptoassets work

Despite the fact that the concept of an option is taken from the traditional financial market, its principle of working with crypto assets will be different. So, in the first case, the behavior of the quote is predicted and the best situation is calculated, in which closing a position will be identical to obtaining a significant profit.

In turn, the subject of the option is valid only for a specific time period specified in the contract. The underlying price of an asset is fixed. And the investor can only hope that the quote of the selected crypto will increase or decrease (depending on which trading strategy was chosen initially), and within the period specified in the contract.

Types of Cryptocurrency Options

As it has already been mentioned, profit from cryptocurrency options can be received in two cases: from the growth or, conversely, from the fall of the asset quote. Considering two possible trading strategies, the following types of crypto options are distinguished:

• Put option. Such an agreement is concluded by a trader who predicts a fall in the price of an asset. If his calculations are correct, after expiration he makes a profit that exceeds the possible dividends from transactions in the spot market.
• Call option. Such an agreement is concluded when the trader is confident in the growth of the asset price.

In addition, there is another classification: depending on the terms of the contract. In accordance with it, options are distinguished:

• European or classic one, which is executed strictly on the last day of the validity period.
• Bermuda, which provides for the right to early termination of the contract. This type of agreement is used extremely rarely with cryptoassets.
• American. The agreement can be executed at any time during the entire term of the contract.

Cryptocurrency options trading: advantages and disadvantages

As it has been mentioned earlier, some experts consider options for cryptocurrencies to be quite a promising financial instrument. This statement is based on the benefits of trading options on crypto assets, which include:

• Resistance to short-term volatility (it is important for a trader to predict the price correctly only at the time of expiration), you can ignore quote fluctuations during the rest of the period.
• Relatively low risk, with unlimited income prospects. In other words, in case of failure, the trader's losses are limited to the premium, and in case of success, there is no income threshold.
• Availability of leveraged derivatives on most exchanges.

At the same time, cryptocurrency options have some disadvantages. For example:

• They are difficult to understand for beginners,
• there is limited choice of platforms for them,
• there is low liquidity of individual assets,
• there is increased risk for the seller. A hypothetical significant growth, or vice versa, a fall in a crypto asset specified in the contract, can bring a significant loss to the seller, which is not covered even by the fixed premium received by him.

Earnings on cryptocurrency options: possible trading strategies

There is no universal technique with 100% protection against possible risk. There are four main approaches used to make money on cryptooptions:

• Long call. Buying a call option when predicting the growth of quotations.
• Long put. Buying a put option in the presence of a forecast for a fall in assets.
• Short call. The strategy of placing a call option. Calculation of the premium in case of correct forecasts of price growth.
• Short put. Put option placement tactics. Calculation of the premium in case of correct forecasts about the fall in prices.

It is also necessary to highlight the combined options, such as:

• Strandle. Using this approach, the trader opens two positions with oppositely directed contracts. Thus, it remains possible to earn on the volatility of the coin, and the direction of the price change will not be fundamental.
• Strangle. A similar concept, which differs from the previous one only in the strike price (a barrier against which the fall or rise in the price of the underlying asset is determined).
• A protective put is the purchase of a put option on an available asset.
• A secured call is when an investor sells an option on the underlying asset at his disposal, in the expectation that the renumeration will cover possible risks.

Conclusion:

Cryptocurrency options are a difficult but potentially highly profitable option with the ability to hedge risks and resistance to sudden bursts of volatility.