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Everything you need to know about options in the cryptocurrency markets

Jan 10, 2024
Everything you need to know about options in the cryptocurrency markets
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The price of the underlying asset is a defining factor. Market volatility is another key factor. The higher the volatility of the underlying asset, the higher the price of the corresponding crypto option. The expiration date of the option also affects its price. The longer the time cushion between the opening of the option and the expiration date, the greater the likelihood that the option will reach or exceed the exercise price. Options with longer terms are called "leaps" and are generally more expensive. Finally, the supply and demand for specific options also affect their price.

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Everything you need to know about options in the cryptocurrency markets - news

What are cryptocurrency options

As the cryptocurrency industry develops, it begins to incorporate more traditional financial mechanisms and tools, among which options have become one of the latest additions to this ecosystem.

Cryptocurrency investors actively use options to minimize risks and expand their influence in the market by using them for diversification of the investment portfolio and increasing potential profitability.

Additionally, options provide traders with limited financial resources with a tool to manage larger sums of money through leverage. Due to the low initial capital requirements for trading options, they offer significantly higher returns on invested capital compared to other types of trading.

Indeed, the crypto options sector has seen rapid growth in recent years. Today, the volume of option contracts in this area reaches billions of dollars.

Comparing cryptocurrency options and traditional options

The main difference between cryptocurrency options and traditional options lies in the nature of the underlying asset. In the case of crypto options, the investor does not have the opportunity to directly purchase the cryptocurrency at a specific price before the expiration of the option. Instead, trading in crypto options focuses exclusively on fluctuations in the value of the underlying asset.

For a better understanding of the differences, it would be useful to examine traditional options in more detail. Traditional options are derivative financial instruments whose value depends on such underlying assets as:

  • stocks;
  • commodities;
  • stock indices.

These instruments provide traders with the right, but not the obligation, to buy or sell a certain amount of the underlying asset at a price fixed at the time of signing the contract. This flexibility in choosing whether to buy or not to buy, sell or not to sell, gives traders greater control and maneuverability.

Option Type Description
Call Options Grant their owners the right to purchase the underlying asset at a pre-set price within a specified time period.
Put Options Give the right to sell the underlying asset at a pre-fixed price within a set term.
Underlying Asset This is a financial instrument, the price fluctuations of which directly affect the value of the option itself.
Exercise Price Also known as the strike price, this is the price at which the underlying asset can be bought (for Call options) or sold (for Put options) provided the timeframes of the option's validity are observed.
Option Expiry Also called the expiry date, this is the period during which the option can be exercised. The time between the opening of the option and its expiry is called "time to expiry." It is important to note that when trading crypto options through StormGain, closing occurs automatically on the day the option expires, so the trader's position also closes automatically if the option is not realized by that time.

Everything you need to know about options in the cryptocurrency markets - news

Determining the price of crypto options

Briefly, the price of crypto options is determined by several key factors. The main one is the price of the underlying asset, which is the defining element of the option's value. The second significant aspect is market volatility, with higher volatility of the underlying asset leading to a higher price of the corresponding crypto option. Another important factor influencing the price is the expiration date of the option. A longer period between the opening of the option and its expiration increases the likelihood of the option reaching or exceeding the exercise price, making such options more valuable and sometimes referred to as "long leaps." Additionally, the price of options is also influenced by market supply and demand.

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