Options can be one of the most difficult financial instruments to master, but this barrier to entry is made up for in their potential for extreme profitability.
Prior to trading options, it's important to familiarize yourself with its fundamental concepts.
Let's look through the main options strategies and investigate its appeal to professional traders.
Buy a Call Option: Bullish
Buying a call is the main strategy in options trading. The primary advantage is limited losses and unlimited profit. As seen on the graph above, losses are limited by the premium paid for the option,but the profit is unlimited and depends on the price increase of the underlying asset.
This strategy should be applied when you are confident in the bullish sentiment in the market and the growth in the price of the underlying asset. If the market is dominated by bears, then it is worth taking a closer look at a Put strategy.
Buy a Put Option: Bearish
This strategy is the opposite of buying a call option and applies in a bearish sentiment market. At first sight it’s not entirely clear why this strategy is appealing, but if you look at the big picture, you can see how it can be extremely profitable.
Here the loss is also limited by the premium paid for the option, and the profit remains unlimited.
We have reviewed two of the main use cases that are simple, and most profitable strategies. Let's move on to something more complicated.
Sell a Straddle: Short Straddle
The strategy is to sell Put and Call options with the same strike price and contract expiration date. The profit on this strategy is limited, but the loss, on the other hand, is unlimited. It is worth using this strategy when you expect a drop in market volatility.
Just like buying a straddle this is an important strategy
Buy a Straddle: Long Straddle
This is a combined strategy and consists of two simpler ones: Long Call A and Long Put A.
The strategy is to buy Put and Call options with the same strike price and contract expiration date. Profit is not limited and arises when the underlying asset moves in any direction.
The best friend of this strategy is high volatility. Losses are limited to premiums paid for two option contracts.
And yes, here is our new option trading interface.
We save the best for last!
Let's assume you are a bitcoin miner who must pay for electricity and other operating expenses at the end of each month. You forecast that you will mine 10 bitcoins in the next month.
You make the deal below to receive income in fiat to pay bills at the end of the month.
1-month Call Option with strike price
$6000 = $500
Selling 100 Call Options
You are a BTC provider, so your income immediately after selling 100 call options is $50,000. You can use this amount to pay for operating costs, such as paying for electricity, repairing broken equipment, or deferring it to your amortization fund.
The price of bitcoin is growing: if the BTC price consolidates above $6,000 by the end of the month, you will provide 100 BTC and get $600,000.
Bitcoin price drops: if BTC drops below $6,000 in the following month, you will not pay anything and you will not receive anything. However, you will still have $50,000, which will be enough to pay all of your costs.