Time to revisit call options as a trading strategy now that Bitcoin Options are available

Buying and Selling Call Options

Buying and selling Call options is the first options trading strategy new options traders learn. It is very straight forward: You buy what you thing is going up at a low price now and sell it at a higher price later. A simple buy low, sell high strategy. That parts simple, the time limited existence and expiring worthless is th part that new traders don’t fully understand or choose to ignore, which causes losses.

The Chicago Board of Exchange, the CBOE is an exchange busier then the New York Stock Exchange. As you can imagine, there are always more small bets then large bets. It’s true in gambling and also investing.

Bitcoin Options are derivatives

Derivative

A Call option is a contract, giving you the right, but not the obligation to buy a certain asset, at a certain price, during a certain time frame. Options are considered a type of derivative trading vehicle, because they don’t represent a share of anything. Additionally, they are also time limited in existence and you need to sell them before they expire or have capitol/cash on hand to exercise them at expiration. Otherwise they expire worthless and you lose all your capitol.

Leverage

However, they allows you to control an asset for a fraction of its real cost. This is called leverage, a small premium of $16.00 allows you to control 1/100th of a Bitcoin, current value with Bitcoin trading at 23k is $230 USD.

The other critical part of this is the price of an option moves very close to the price of the stock. So a one dollar option on a one hundred dollar stock which increases in price from 100 to 110 will frequently go up ten dollars. A huge gain on the option of 1000% versus the gain on the stock of 10%.

Example:

You buy one option contract, giving you the “option” to buy 100 shares of stock at the strike price of $100, and you pay $10 per share or $1000 premium for this option.
This costs $1000
If Stock price increases to $104, the value of your option increases to $5 ($1 plus $4 in stock price increase)
So you sell the option.
Your profit is (5$-1$) times 100= (profit-cost)multiplied by 100 shares in each contract.
(5$-1$=4$)x 100=400$ profit
The return on your investment is:
Profit/Capitol Invested=return on investment
400$/1000$= 40% in 30 days

These numbers vary, and can be higher or lower. As you can see it’s this leverage and the lure of easy money which makes buying and selling calls so popular. However it’s the probability of that change in price which predicts the real chance of that move and the greater the move, the lower the chance in general. But it does happen, which makes Buying and Selling options very popular in a bull market.

Remember Warren Buffets quote;

...the markets are a very efficient way to transfer money from the inpatient to the patient.
Options are time limited, so always buy yourself enough time to be right.

Bull markets and Call options

In general, Buying and Selling call options is profitable in a bull market, as long as the underlying asset trend is upward or increasing in value. However it is possible to lose by being over optimistic, choosing strike prices which are to high and having your option contracts expire worthless.

If you have ever considered options trading this maybe a good time to learn and share in some of the euphoria of a bull market run.

This is my personal opinion, and not investment advice. Do your own research before investing.