Warren Buffett said in one of his famous quotes, “Be afraid when others are greedy, and be greedy when others are afraid.”. Sometimes, we may be so careful about our investments that we end up not taking actions that could change our lives. When it comes to buying and selling, every investor knows that to maximize profits from sales, he should strive to buy at a relatively lower price.
Unfortunately, it’s not every time you see market prices go down; Most of the time, market price fluctuations can make you so confused that in an effort to reduce your risk, you end up with many hesitations. Other times, you may have to wait a long time with your idle capital while you wait for your desired buy order to be executed.
What you may not realize is that you can earn a steady return flow while waiting by trading options. Buffett made $7.5 million in 5 minutes using this very strategy. This, therefore, begs the question, what is options trading and how can you take advantage of it to reduce risks and earn more profits?
Options trading explained
For the uninitiated, options are a trading system that involves buying and selling an asset, stock or derivative at a specified price during an agreed period. This means that during a specified period, you will be able to buy and sell at a fixed price regardless of the current market prices during the same period.
According to this definition, three components make up options trading:
- Option type (call or put option)
- Fixed price (or execution price)
- The agreed period (after which the option expires).
In order for the options trading agreement to continue, you as the trader (either buyer or seller) have to pay a certain amount to insure the option. This is known as the premium, it is just a fraction of your trading capital.
During the term of this options agreement, you will be able to exercise the option or not, depending on how favorable market conditions are. If you decide not to exercise the option, it will expire after the time period has elapsed and your loss will only be the amount of the premium. In this case, the loss is a fraction of what you could have lost if you were trading live.
There are two types of options trading:
1. Put the option
Buying this type of option simply means that you have an asset that you want to sell. If you expect market prices to fall and you fear that your assets will lose a lot of value during this period, then this option is for you.
For example, suppose the price of bitcoin stands at $35,000 and David has 1 bitcoin and is willing to sell it for the same amount but is afraid that the price will go down in the next month, he can decide to pay a premium for an options contract starting from June 1st to July 1st . So the strike price will be set at $35,000 for the term of this contract.
If by the end of April the bitcoin price drops to around $28,000, David could decide to exercise this contract by forfeiting the collateral (which is 1 bitcoin he owns). Once he does that, he receives $35,000 instead of $28,000 which would have translated into a loss of $7,000 if he was trading live.
In contrast, if the bitcoin price increases to around $43,000 during this period, David may decide not to exercise this contract to sell his bitcoin for less. In this case, he forfeits the contract and loses only a small part of his capital which is the amount paid for the insurance premium.
2. Recall option
This category of trading options positions you as a buyer. After getting the Call option, you will need to decide how much you will buy the asset and specify the period after which it will expire.
Let’s take David as an example again, let’s say on June 1st he decided to buy a put option of 1 Bitcoin at a set price of $35,000 because he expected the price to go up. He therefore pays the premium fee and sets the contract until it expires on the 1st of July.
If he starts selling Bitcoin at the end of June at $43,000, he may decide to exercise the call option by depositing the required collateral which in this case is the $35,000 strike price. This way, he saves up to $8000 that he could have spent had he decided to buy Bitcoin at a later time.
However, assuming the bitcoin price drops to $28,000, he may decide not to exercise the call option in which case he will only lose the amount of the premium paid, thus reducing risk in the process.
Buying options are usually good for bullish traders who expect market prices to rise.
Where can you trade options?
Options trading is available at hedgehog platform. Since their arrival in the DeFi space, the platform has brought amazing use cases for options trading. In addition to the above options trading examples and digital settlements, they also provide an opportunity for cash collateral and settlement.
The platform ranks among the first movers and market leaders of bitcoin and cryptocurrency buying and selling options. It operates on both Binance Smart Chain and Ethereum, and is currently fine-tuning its platform and preparing to increase options liquidity through its strategic partners.
Trading Options on Hedge is as easy as possible, just visit their website at https://www.hedge.com And explore how you can improve your cryptocurrency trading toolkit with techniques like options trading mentioned above.
Image by Sergei Tokmakov, Esq.