@rawdawg spent 20 years of his life trading and involved in the financial world. If there is one thing he could say he is an expert in, it would be trading strategies, risk, and overall market knowledge as it relates to equities, options, futures, and forex.
He has recently begun to educate himself on cryptocurrency, blockchain, and DLT. @rawdawg is excited for the fact that soon we are going to have listed derivatives via the CBOE for cryptocurrency which is going to open a whole new ballgame for leveraged trading and more specifically options on cryptocurrency.
Today, @rawdawg is going to talk about option trading and how one will be able to utilize options to trade cryptocurrency once they are listed and approved.
@rawdawg will use basic examples so those not familiar with the subject can grasp the concepts more clearly.
There are two types of option contracts. Call Options and Put Options.
Call options give the buyer the right but not the obligation to be long from a specific strike price on or before a specific expiration date.
For example: If there were options on Bitcoin(which there aren't yet) a typical call option would be the following.
The January BTC $7000 Call currently trading at $5. As an example, the contract size would be a multiplier such as 100 BTC.
So the cost of this option would be $5 times 100 or $500.
This option contract gives me the right but not the obligation to be long 100 BTC at a strike price of $7000 on or before an expiration date in January.
I paid for this option so my maximum amount of risk is $500 and my upside is unlimited.
BTC is currently trading at approximately $6000 and I believe that BTC is going to rise to $7000 or higher by January expiration. My breakeven point would be the strike price plus what I paid for the option, which in this example is $5. So breakeven on the day of expiration is $7005.
If BTC never rises above $7000. I lose my entire $500 investment.
If BTC goes to $7040 I make the difference between $7040 and $7000 which is $40 minus what I paid which equals a profit of $35 times the 100 multiplier which leaves me with a profit of $3500.
So, as you can see the leverage multiplier of 100 leaves for some exciting possibilities via options.
Options are highly leveraged and speculative meaning profits and losses can accrue quickly.
The nice part is that you don't have to wait until expiration to close the position and you can sell the option early if prices move in your direction or cut your losses if prices move against you.
Put option are the exact opposite of call options. They give the buyer of the put the right but not the obligation to be to be short from the strike price.
So in this example BTC is trading at approximately $6000 and I think that by an expiration date in January BTC is going to drop significantly.
So I decide to purchase the January BTC $5000 Put option for a price of $10. This gives me the right but not the obligation to be short from $5000.
In this example I paid $10 for the put option times the 100 multiplier gives me a max risk of $1000.
I believe BTC will drop below $5000 on or before the expiration in January.
If BTC were trading at $4950 on expiration I would calculate my gain as follows:
$5000 less $4950 which equals $50 minus the $10 I paid for the option which leaves a $40 per option gain.
I then multiply $40 times 100 which leaves me with a $4000 gain.
If BTC never gets below $5000 I would lose my initial investment of $1000.
@rawdawg can't wait until options are listed on bitcoin and other cryptocurrency.
The examples he provided are very basic beginner examples of buying options.
There are much more advanced strategies that can further be explained in additional posts.
Steemians, this is @rawdawg signing off!
Steem on you steemboaters!
Sorry i posted the same post twice. . .was getting Transaction Broadcast error
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