Crypto options trading is a type of trading that permits traders to guess a price movement of crypto without actually owning them. It is a type of contract between the buyer and seller where the buyer has the right and not the responsibility to buy or sell assets at a fixed price and time.
This is a way for investors to take advantage of the market movements without the need to own the underlying asset which is crypto here.
To trade with crypto trading, options require an understanding of strike price, expiration date, and premium. American and European are the two types of crypto options. Both have the differentiation of working before and after the expiration date.
The American option can be exercised at any time before the expiration date but the European options can only be exercised on the expiration date.
Terms Related To Crypto Options Trading
The benefit associated with crypto trading is the ability to use leverage. This means that traders can control a large amount of crypto with a small amount of capital. Some terms related to options trading are:
- Call Option
The call option gives the right to the buyer to buy the asset at a fixed price but it involves no obligation. The right to this type of contract includes a specific timeframe.
2. Put Option
The put option gives the right to the buyer to sell the asset at a fixed price and it does involve the needed time frame. It has no obligation.
3. Strike Price
The underlying asset which is crypto here is bought or sold at a price which is called strike price.
4. Expiration Date
The date at which the option expires is the expiration date.
5. Premium
It is the price paid by the buyer to the seller for the right to buy or sell assets at the strike price.
6. In-the-Money
When the asset price is favorable for the buyer to sell and buy the underlying asset, then, this option is considered in-the-money.
7. Out-of-the-Money
When the underlying asset price is not favorable for the buyer to buy or sell, then an option is considered out-of-the-money.
8. Implied Volatility
Implied volatility is a measure of the market expectation of the future volatility of the underlying asset.
9. Time Decay
It is the loss of value in an option contract as it approaches its expiration date.
10. Intrinsic Value
There’s a difference between the current market price and the strike price of an asset. This price difference is called intrinsic value.
11. Time Value
The time left for the expiration of the option premium is called time value.
12. Options Greeks
These are the financial measures which include Delta, Gamma, Theta, and Vega. Delta concerns the change in the assets price, Gamma is for price volatility, Theta is a measure of the sensitivity of the option to time decay, and Vega is for changes in implied volatility.
Summary
Crypto option trading has many benefits such as limited risk, hedging, flexibility, leverage, and diversification. On the other hand, it has high volatility, lack of regulation, limited liquidity, and complex instruments. Hence, it is always advised to gain full knowledge and understanding of the market.
Source: https://www.thecoinrepublic.com/2023/08/30/understand-crypto-options-trading-and-its-related-terms/