Understanding This Sets You apart from the 99%
Options: The Traders "Insurance plan"
The “This” im talking about is options, Options are powerful and can be used in many ways
Hedging position
Lower upfront costs
Cap Downside
Can be used as “insurance”
Capital Efficient
These are just a few of the utilities. In this article Im going to explain how options work and give examples of Where and How they can be used. Before diving in, let’s explain how the traditional stock market works.
The stock market is a game of buy low, sell high. 9999 times out of 1000 The reason why people buy stocks is to make a profit. Thats great and all if you have heaps of cash at your disposal but what if you only have 100$? Your Hopes are to YOLO bet on the next meme stocks to win the lottery. We all know how this ends 😉.
What are options
With options instead of having to pay the entire cost of the asset you can pay a “premium” that is a fraction of the cost to have the right but not the obligation, to buy the asset at a certain price by a certain Date.
Before we give some examples lets give some Vocab Terms
•CALL OPTION — The right, but not the obligation, to BUY an asset at a specified price before a specified expiry date
•PUT OPTION — The right, but not the obligation, to SELL an asset at a specified price before a specified expiry date
•STRIKE PRICE — The price at which a put or call option can be exercised
•CONTRACT EXPIRY — The date when the options contract expires OPTION
•PREMIUM — The cost of the option contract (put/call)
For this example Im Going to Use Lyra financce
I can basically buy an option to buy 1 eth at 2000$ at the end of october for $323. Now I know your saying “Why the pants would I do that”. Well lets say your bullish on ETh and dont have the 2000$ for 1 ETH, you just have a 500$ pay check to invest. Well at this point you can do a couple of things:
simply buy .25 eth (Were going to assume ETH is trading at 2k)
Buy an option for 1 ETH for $323. Can also hedge position with the rest of the money a put option….(more on this later)
Buy .125 Eth and buy a put option to hedge Eth position
Do nothing
For simplicity we are just going to resort to option 1 or 2.
Option 1 :
Risk is Eth goes to 0 (lose $500)
Reward Eth goes to 4k ( I make 500$)
Option 2:
Risk Eth goes to 0 (lose $323)
Reward Eth goes to 4k (make over $1500)
The 1500 Is not a typo, The reason you can make much more with the option in this senario is because your able to get the upside exposure to more that just .25 ETH with the option. You also have less exposure to the downside because the most you can lose is the cost of the option.
Hedging with options
Normally if you want exposure to ETH you can simply just swap some stablecoins for some ETH. This gives full exposure to the upside and the downside.
Option 1:
buying 10 eth at 2k a pop is $20,0000
20k out of pocket
Eth goes to 0 lose everything
Eth goes to 1000 lose $10,000
eth goes to 4k I now have 40k
Option 2:
buying 8 Eth for 2k a pop ($16,000) and using the other 4k to buy a put option in the case eth goes to 1000$
20k out of pocket
Eth goes to 1000…… my 16k goes to 8k but my put option will profit me 5.3k after fees.
So instead of being down 50%, with the Hedge im down a little over 33%
Now if eth goes to 0 I profit $15,412 from the Put. So I basically only lose 4.6k where as If I just went all in on Eth I would have lost everything
Eth goes to 4k I have 32k on eth- the 4k for my option so would end up with 28k instead of 40k….. sure I may not be up as much but Im still up.
Crypto and investing is not about making a 100x on each play, its about protecting what you have and surviving. Options give you the ability to Hedge your position and Cap your downside. Learning how to use them and profit from them will set you apart from the other 99%.
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Cheers