A cryptocurrency option is an investment that can be used to make money by selling or buying an underlying asset at a specified price. This method is similar to futures trading. However, there is more flexibility in crypto options. Some options allow the buyer to sell the asset after a certain period of time. While this can be beneficial for an investor, it can also be risky. Investing in derivatives is a way to diversify and protect a portfolio from unpredicted risks.
There are two main types of options available: calls and puts. Call Options can be used to profit from an underlying asset if it goes up. Alternatively, they can be used to limit risk if the underlying asset doesn't go up. If the underlying asset price does not reach the strike price, the call option will expire. The amount of money that an investor makes depends on the volatility of the asset.
Put Options are usually less risky. Depending on the strike price, the amount of money an investor earns can range from zero to a large amount. These are useful if an investor believes the underlying asset will be worth less than the purchase price. They are particularly helpful in bear markets. Traders often buy put options when the price of an asset drops. In this scenario, the put option gives the investor the right to sell the asset at a specified price.
Crypto Option market making are traded through online platforms or smaller exchanges. This means the transaction process is more informal. Market makers play a major role in making sure the market is liquid. Generally, markets have a wide bid-ask spread, which can increase the volatility of an asset. Additionally, it can be hard to get an order filled when the price of an asset is volatile. Having a good market maker will reduce this risk.
Various Contract Options
As with futures, there are a variety of different contract options. One of the most common is the perpetual contract, or perpetual swap. It is the most popular among day traders. Other types include the married put and the diagonal spread. Regardless of the type of option you choose, you will gain or lose depending on the future price of the asset. Unlike futures, there are no guarantees that the underlying asset will rise or fall in value.
For traders who are bullish on crypto, the diagonal spread is a good choice. Buying a long put option and an OTM call Option can be used to create a spread. This is especially effective when the underlying asset's price moves sideways. Ideally, both strike prices should be close to the underlying asset's price.
Covered Call Strategy
Another popular strategy is the covered call. It involves purchasing a call Option for an asset with a lower strike price than the underlying asset. When the underlying asset price moves in the opposite direction, the investor will lose their money, but the option will still generate a passive income.
Why Cryto Derivatives are important?
In matured financial systems crypto derivatives play a major role as under
Increasing liquidity
It is basically how orders can be easily transacted within a market without any external issues and without affecting the price of an asset. The liquid market attracts various investors and traders. Here the transaction cost will be cheaper and market conditions would be more favorable.
Optimized price discovery
It is the process to find out the current price of an asset and this price may depend upon various factors including market structure, information flow, etc.
Mitigating risks
Derivatives will protect your asset from upcoming risks in the terms of crypto-asset prices. A solid derivatives market assists with drawing in proficient brokers and institutional financial backers to the crypto business since it mitigates the gamble achieved by a portfolio's openness to tail-risk occasions.
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