Put stock – what is it in trading?
Exchange trading takes place not only on spot platforms. Derivatives are also quite popular, and options are one type of derivative. Let's explore the concept of a put option in cryptocurrency trading.
What is a Put Option?
Technical analysis allows traders to generate substantial profits. Making an accurate prediction of future prices is the key to successful options trading.
Put options are contracts that give traders the right to sell a cryptocurrency. This instrument is used when a trader expects the price of the cryptocurrency to decline.
The holder of the option has the opportunity to transfer their coins to another party in exchange for fiat money. Trading on a bearish market allows for greater fiat currency returns compared to similar conditions on the spot market.
Advantages of Put Options
Options are useful for traders due to the following reasons:
- Ability to trade on bearish markets.
- Options allow for profit when the asset's price remains stagnant.
- Cryptocurrency traders receive precise information about potential risks.
- Options provide protection against stop-loss hunting and liquidations.
Such derivatives enable experienced traders to conduct successful trades on almost any market.
Profit Calculation and Strike
At the expiration of the option, the potential reward is calculated using the following formula: (cryptocurrency price at expiration) - (option strike price). The strike price is the predetermined price level taken into account after the contract expires. The trader's net profit is calculated considering the cost paid for the option contract.
Is it necessary to hold the option until the expiration date?
No, it is not necessary. An acquired option can be sold at any time, and a sold option can be repurchased. The difference in the transaction price will determine the trader's profit or loss.
How is the price of an option determined?
Traders need to understand the pricing structure of an option. Its main components are:
- Option type - put or call.
- Expiration date.
- Strike price.
- Price of the underlying cryptocurrency.
- Volatility - the higher the volatility, the more expensive the option.
It's worth cautioning novice traders not to invest all their money in options. It is also advisable to avoid trading during periods of high asset volatility.