In traditional finance, the underlying assets of options are varied and different. There are options on,, exchange rates (foreign exchange options), stocks, indices, etc. If a long term long user of ETH in cryptocurrencies, he can easily achieve a price exposure of 1 ETH by purchasing a call option costing only 0.1 ETH. In addition, he can sell/short an ETH put option and receive an immediate premium, and buy ETH on the downside during an ETH price correction through the exercise of the sold option.
Options are leveraged, but traders who purchase them do not have to worry about liquidation, as all buyers pay a pre-determined premium without having to provide pledges or margin. The potential loss to the option holder is capped, while the gain can be unlimited.
If we change the underlying asset to a cryptocurrency, this is the crypto asset option we will be introducing. Currently, BTC and ETH options hold the largest market share.
Of the centralised derivatives exchanges that currently dominate, Deribit offers the deepest liquidity and controls 90% of the options market. Others such as CME, Huobi, OKex and LedgerX are all growing rapidly. Put options can be purchased to protect against large price falls (for example, to protect your assets in the event of a flash crash in March 2020) at a cost of only 5% of the market price. Interestingly, unlike a futures contract, if the market price continues to rise, the option holder can choose not to take the option and still enjoy the benefits of the rising price of the underlying asset. Options can be an ideal financial protection tool to help you sleep well at night.There is always controversy surrounding the safety and hedging characteristics of crypto assets, mainly because of their high volatility and the risk issues associated with coding issues. Options can be a good hedge against such risks as they can provide unlimited returns while limiting your losses to the relatively small option premium you pay to hold the option contract. For the option holder, the maximum loss is capped at the option premium, while the gain from volatility can be substantial if the price moves in a favourable direction. A long call option strategy is one of the most basic trading strategies, where the user purchases an option with the expectation that the price of the underlying asset will rise significantly and will exceed the strike price over the life of the option.
Sam is an ETH holder and is very bullish on the future price of ETH in the long term due to the growing DeFi ecosystem on ethereum. He currently holds 1 ETH and expects the price of ETH to rise in the near future. To amplify the gains from the price increase, Sam bought a call option on 1 ETH with a strike price of $700 and a 15-day expiry date. The option fee for the contract is $70.
If, as Sam expects, the price of ETH rises by 20% to $840 in a fortnight, Sam will receive a return of $140 by executing the call option ($840-$700), a return of 100% (($140-$70)/$70). The call option gives Sam a 5x leveraged return.
If the ETH price falls 20% to $560 within two weeks, Sam will have the option not to exercise the call option and he will lose $70. In other words, Sam would only lose $140 if he held an ETH option, even if there was a price crash.
If Sam's bullish expectations are so strong, he could even deposit ETH into Makerdao, Compound or Aave and borrow the stablecoin to buy the call option. This would give him more leverage, and the associated risk would be higher. A protected put option strategy is a strategy that creates a protected put position by buying (or owning) an asset and purchasing a put option with a strike price equal to or close to the current price of the asset, thus providing price insurance.
Henry holds some ETH and is pleased that the price has recently continued to rise and exceeded $750. Although he is concerned that the market may correct, he has difficulty anticipating the magnitude of the correction and does not want to give up potential profits if the market continues to rise.
With this in mind, Henry purchased a put option as insurance, with a strike price of $740. This means that even if the market falls, he still has the right to sell ETH at $740. If the price of Ether continues to rise, he can always choose not to exercise the put option and continue to enjoy the gains that the rising price gives him.
In this example, Henry has purchased a put option as insurance, so he is thus protected from the price and still enjoys the gains from the price rise. Covered Calls are strategies that create covered calls by owning assets and selling an equal amount of calls. By executing this strategy, the investor reduces the cost of holding the underlying asset by holding the asset and selling the call option on the underlying asset and generating cash flow income.