Ethereum Options Trading

What are Ethereum options?

Since Ethereum is a cryptocurrency, it is volatile; Ethereum options allow you to make most of this volatility. Thus without the need to own the underlying asset, you have the opportunity to be exposed to the risk. The cryptocurrency is well-known for its 10387% increase from January 2017 to January 2018, followed by a 90 % increase during 2019. Ever since the DeFi development increased in the Ethereum ecosystem, it has been in high demand.

Although the vocabulary used in options trading remains the same as that of traditional financial markets, you should still be aware of the key concepts before starting Ethereum options trading.

Holding and writing options

Two key words in option contracts are the ‘holder’ or buyer and the ‘writer’ or the trader. These can be used for both Put and Call options.

Ethereum call options

While exercising a call option, you have the right to buy Ethereum but not the obligation to purchase the underlying asset at a fixed price or strike price on or before the expiry date. For example, you would exercise a call option if you anticipate or speculate that the underlying asset would depreciate over the expiry date.

It would be best if you remembered that a premium is a minimum price for entering into a contract. The strike price is the price of the underlying asset that has appreciated or depreciated at the end of the expiry date.

At the end of the specified date or expiry date, the underlying asset’s price decreases below the strike price as predicted by you; then, you can buy Ethereum at a predetermined price, also called premium price. You profit by getting paid with the strike price and the spot price or the price at which Ethereum is trending.

However, at the end of the expiry date, if the price of Ethereum increases more than the strike price, you can exercise your right to not buy the underlying asset. Thus you exit the contract by paying the premium instead of paying both the premium price and the spot price of the strike price and the entire amount of the underlying assets.

Ethereum put options

While exercising a put option, you have the right to sell Ethereum but are not obliged to sell it at the expiry date.

If you have entered into a put option contract while Ethereum options trading, and the underlying asset’s price has gone down below the strike price as predicted, then you can make a profit by keeping the premium and the spot price.

However, if the price increases above the strike price and you had speculated that it would go down, you can exit the contract by paying the premium, not the difference between the strike price and the spot price. Thus you minimize the loss which you might have to face.

Ethereum options strategies

Since Ethereum is a cryptocurrency, it can be challenging to predict the next price reversal trend, from bullish to bearish and vice versa. This is because the cryptocurrency market works differently than any traditional financial market. Normal economic factors affecting the traditional financial market do not apply to cryptocurrency.

There are other ways to approach Ethereum to exploit the price fluctuation of Ethereum. For example, there is one more option called the ride option. This idea is to mitigate the risk involved while dealing with options.

The Ethereum ride option works by entering into two Ethereum option contracts. You enter into the call option and the put option simultaneously with the equivalent number of Ethereum.

If the price trend of Ethereum increases the strike price at the end of the expiry date, then you are faced with two options. In one of the options, you make a profit, while in the other, you make a loss. Thus if the price trend of Ethereum has increased more than the strike price and you have a call option, then you can exit the contract by paying a premium.

However, a second contract opens the put option; as the price of Ethereum has increased more than the strike price, you are in for a profit. This is because you have gained the premium amount and the difference between the strike and spot prices.

This is also true if the price trend of Ethereum has decreased below the strike price at the end of the expiry date; then, as we have seen above, in one contract, you make a profit, while in the other, you exit by paying the premium of that contract.