What do I need to know about Crypto options?
Crypto options differ from traditional options, in that they are derivative instruments that provide the ability to trade on the price fluctuations of the underlying crypto asset without the necessity of actually owning the crypto asset itself. When trading crypto options, you’ll be gaining or losing the difference between the opening and closing price of the position, depending on where it was trading when the crypto option contract was activated.
StormGain gives you the power to trade crypto options on a variety of different crypto assets. The crypto assets that can be traded as options can be found in the platform’s Options section, listed as a subsection of the specific crypto asset. Here you will find the different types of options contracts, such as calls and puts, along with expiry dates and strike prices.
For example, below you can see Call and Put options on Bitcoin, expiring in November with strike prices ranging from 19,100 to 19,400.
The key difference between crypto options as derivatives here and traditional, physical options, is that with crypto options, you will not be able to buy the underlying asset at the specified price before expiry. Rather, you’re solely trading the price fluctuations of the underlying asset.
Crypto options vs traditional options
Now that we’ve covered the basics on crypto options, let’s go over some of the basics about traditional options to help you trade even more confidently. Traditional options are derivative financial instruments whose value is determined by the underlying asset, such as a stock, commodity, or equity index. They provide traders the option, but not the requirement, to buy or sell a specified amount of the underlying asset at the price it was trading at when the contract was initiated. Because this is not a requirement, they do not oblige the trader to buy or sell, which allows for greater flexibility.
- Call options give the owner the right to buy the underlying asset at a predetermined price within a certain time frame.
- Put options give the owner the right to sell the underlying asset at a predetermined price within a certain time frame.
- The underlying asset is the financial instrument whose price fluctuations determine whether the value of the option goes up or down.
- The strike price is the price at which the underlying asset can be bought, in the case of call options, or sold, with put options, if they are exercised by expiry.
- The expiry, often referred to as the expiration date, is the specified time frame for which the option can be exercised. The period between opening and expiry is known as the “time to maturity.” Please note that the crypto options offered on StormGain expire automatically at their expiration date, meaning that the position will be closed automatically if not sold by then. It’s therefore important to keep a close eye on your crypto options contracts.
What determines the price of Crypto options
Without spending hours going into excessive details and financial formulas, it’s enough to say that the following key points determine the value of crypto options:
- The price of the underlying asset is a central determining factor.
- Market volatility is an additional key factor of the price and value of crypto options. Higher volatility typically translates into a higher price for the associated crypto options.
- The date of expiry also influences the price. The greater cushion of time between opening and expiry, the greater the chance is that the option will reach or exceed its strike price. Options with far out expiration dates are known as leaps, and are typically more expensive.
- Lastly, the supply and demand for specific crypto options will influence price.
Now that you understand the basics, let’s jump into the reasons why trading crypto options may be right for you.