Get to know the crypto option definition by checking out the information below!
What Is A Crypto Option?
A crypto option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell a specific amount of cryptocurrency at a predetermined price within a certain period of time. The predetermined price is called the strike price, while the deadline is known as the expiry date.
What You Need To Know About Crypto Options
There are two types of crypto options – call options and put options, both of which can be entered into either a long position (buying the asset) or a short one (selling the asset). Here’s what they mean in a nutshell:
| Long Call Option | Long Put Option |
| Bought with the expectation that the underlying asset’s price will rise, potentially resulting in a profit from purchasing the asset at a lower price and selling it for more. | Bought in hopes that the underlying asset’s price will fall to profit from selling it at a higher price and buying it back cheaper. |
| Short Call Option | Short Put Option |
| Sold when expecting the underlying asset’s price to remain below the strike price, potentially resulting in a profit from the premium received. | Sold with the expectation that the underlying asset’s price will stay above the strike price, thus profiting from the premium. |
Each position has a different risk and reward profile, and investors should carefully consider their investment goals and risk tolerance before choosing one. For instance, the financial risk in long options is limited to the premium paid for them, while short options feature unlimited risk.
The holder can choose whether to exercise their option at any time before the expiry date or not. The decision is often achieved by means of analyzing the relationship between the market price and the strike price, as this correlation determines the potential for profit or loss.
