Hi Friends
Today we will explain the option contracts affect on crypto and other markets.
First lets see whats an option contract?
Options are derivative contracts that entitle the purchaser to buy or sell the connected asset at a predetermined price before the contract expires.
There are two types of options , call and put. The right to buy is known as a ‘call’ option, whereas the right to sell the underlying asset is called a ‘put’ option.
Every options contract comes with a specified expiry date which is the last date for settling the contract.
The price at which the options contract is settled is called the strike price.
This is the price at which the options contract owner is allowed to buy/sell the underlying cryptocurrency.
The price at which an options contract is bought is called the premium.
Now, when would you buy a cryptocurrency? Obviously when it is trading at a price that is lower than it should be,right?
This means that you find it to be undervalued and you expect its price to rise in the future so you can sell higher and make money.
But what if the crypto price fell instead? Wouldn’t it be nice if somebody would still buy the cryptocurrency from you at a higher price?
For that you would require selling rights of the cryptocurrency and you will buy a put option.
Now on the flip side when would you sell a cryptocurrency? Of course, when you think that it is trading at a price higher than it should be.
This means that you find it to be overvalued and expect it to fall from here.
But what if the price of the cryptocurrency rose instead?
You would then want to add more crypto at a lower price and sit on assets that are valued higher than your purchase price.
For this you would need buying rights or a call option.
Since options allow traders the right to buy/sell assets at a predetermined price they shield them from the volatility of the crypto markets.
Moreover the volume of the call or put options in the market signals the direction in which investors expect the markets to move.
More put options indicate that investors expect the markets to fall whereas more call options indicate that investors expect the market to rally.
Now when the option contracts are near their expiration date, large players try to drive the underlying crypto price into a favourable range depending on the option contracts they have purchased. This is done so that the deal can become profitable.
In summary:
Buying a Call (Long) = Bullish -----> you think the crypto will be worth more later so you want to lock in todays price to buy later at a profit.
Selling a Call (Short) = Bearish -----> you think the crypto will be worth less later so you want to lock in todays price to sell later at a profit.
Buying a Put (Short) = Bearish ------> you think the crypto will be worth less later so you want to lock in todays price to sell later at a profit.
Selling a Put (Long) = Bullish --------> you think the crypto will be worth more later so you want to lock in todays price to buy later at a profit.
I hope you enjoy this education please share me your opinions in comments.
thank you all specially @TradingView team
Today we will explain the option contracts affect on crypto and other markets.
First lets see whats an option contract?
Options are derivative contracts that entitle the purchaser to buy or sell the connected asset at a predetermined price before the contract expires.
There are two types of options , call and put. The right to buy is known as a ‘call’ option, whereas the right to sell the underlying asset is called a ‘put’ option.
Every options contract comes with a specified expiry date which is the last date for settling the contract.
The price at which the options contract is settled is called the strike price.
This is the price at which the options contract owner is allowed to buy/sell the underlying cryptocurrency.
The price at which an options contract is bought is called the premium.
Now, when would you buy a cryptocurrency? Obviously when it is trading at a price that is lower than it should be,right?
This means that you find it to be undervalued and you expect its price to rise in the future so you can sell higher and make money.
But what if the crypto price fell instead? Wouldn’t it be nice if somebody would still buy the cryptocurrency from you at a higher price?
For that you would require selling rights of the cryptocurrency and you will buy a put option.
Now on the flip side when would you sell a cryptocurrency? Of course, when you think that it is trading at a price higher than it should be.
This means that you find it to be overvalued and expect it to fall from here.
But what if the price of the cryptocurrency rose instead?
You would then want to add more crypto at a lower price and sit on assets that are valued higher than your purchase price.
For this you would need buying rights or a call option.
Since options allow traders the right to buy/sell assets at a predetermined price they shield them from the volatility of the crypto markets.
Moreover the volume of the call or put options in the market signals the direction in which investors expect the markets to move.
More put options indicate that investors expect the markets to fall whereas more call options indicate that investors expect the market to rally.
Now when the option contracts are near their expiration date, large players try to drive the underlying crypto price into a favourable range depending on the option contracts they have purchased. This is done so that the deal can become profitable.
In summary:
Buying a Call (Long) = Bullish -----> you think the crypto will be worth more later so you want to lock in todays price to buy later at a profit.
Selling a Call (Short) = Bearish -----> you think the crypto will be worth less later so you want to lock in todays price to sell later at a profit.
Buying a Put (Short) = Bearish ------> you think the crypto will be worth less later so you want to lock in todays price to sell later at a profit.
Selling a Put (Long) = Bullish --------> you think the crypto will be worth more later so you want to lock in todays price to buy later at a profit.
I hope you enjoy this education please share me your opinions in comments.
thank you all specially @TradingView team