5 Options Strategies to Limit Losses and retain high Upside Potential

Trading screen

Crypto Options trading strategies involve buying or selling multiple options contracts at the same time to optimize invested positions, hedge risks ,and profit from anticipated market movements cost-effectively.

Options contracts have two forms: call and put options. A call option gives the buyer the right to buy the underlying asset at a given strike price, while a Put option gives the right to sell the underlying asset at the strike price. The trader who buys a call option believes that the asset’s price is going to increase and buys a put option if the belief is the opposite.

The risk is capped at the premium paid to buy the option and the profit/loss is therefore determined by the difference amount between the spot price and the strike price including the premium.

For example, a trader buys a call option that has a strike price of $10,000 for 0.05 BTC. He earns the right to buy 1 BTC for $10,000. At the expiration of the contract, the BTC is priced at $12,500 and the delivery price is the same at $12,500. In this situation, the options contract is settled for $2500 per unit of bitcoin. At its expiry, the trader’s wallet is credited with .02 BTC (2,500/12,500) while the seller is sent 0.02 BTC. The initial price of the purchase was 0.05 BTC, therefore, the trader’s profit is 0.15 BTC

Let us find some options strategies that help traders leverage the upside potential while simultaneously limiting downside risk.

Collar options

Collor option
Source: optionstrategiesinsider.com

A collar, or most commonly called a hedge wrapper, is an options strategy that is utilized to reduce large losses, but it also limits larger gains. The trader opens a collar position by purchasing a put option while simultaneously writing the call option. It involves buying a put option at strike price A and selling a call option at price B to hedge against potential downsides. A trader should consider using a collar if they are long on an asset that has substantial unrealized gains. The collar option strategy offers protection if the asset’s price falls below strike price A.

Collar Example

If bitcoin is trading at $100 and expected to trade low over the next few months, a trader could execute a 95/105 collar by buying bitcoin, buying one 95-strike price put, and selling one 105-strike price call for the following prices:

Buying 100 unit of bitcoin at $100

Buy 1 bitcoin 95-strike price put for $1.50

Selling 1 bitcoin 105-strike price call for $1.80

Total premium = $0.30 credit

Long Straddle

A straddle position comprises a call and a put at the same strike price and expiration date. Long straddle implies buying both the call and the put and the short straddle denotes selling both the call and the put. Straddle generally means having two transactions on the same asset with positions that offset each other. 

Crypto arbitrage
Source: Cryptoarbitrage

The current price will be at or near the strike price chosen when opening a long straddle position. Since you are buying two options together, you will pay more premium than you would if you were picking a certain direction. This position is a fixed risk, therefore your max loss is the premium you have paid to open the position.

Straddle Example

If an asset is trading at $100 and a trader is expecting it to either rise of the tank in the near future, he can purchase $100 call and $100 put for the net cost premium of $6

If the asset was to trade up to $125 upon expiry, then the $100 call would be worth $25, minus the $6 premium, resulting in a profit of $19. On the flip side, if the asset were to tank to a price of $75 upon expiration, the $100 put option would then have a value of $25, resulting in the same $19 profit after the premium paid is deduced.

Protective Put

Option startegies in sider
Source: optionstrategiesinsider.com

A protective put is a trading strategy which is employed by the trader when he is still bullish on an asset but wishes to hedge against potential downsides, losses and uncertainty. Also referred to as a synthetic long call or married put, it is an options strategy that implies owning an asset and then buying one put at strike price A. The investor following this strategy has goals to reduce the risks of losses and lessen the volatility of his portfolio.

Protective Put Example

Let’s say that BTC/USD is trading at $9000. A trader owns 1 BTC but to protect the losses, the trader buys a put option of strike price $8500 and pays the premium of $200. If the price at expiration goes below the strike price, the trader will exercise the put option and limits its losses while still retaining the upside potential in case the price moves up. 

Long Butterfly

Long Butterfly
Source: Google

A long butterfly is a combination of three legs and four total options with Bull spread and Bear spread. Long butterfly involves buying one call at strike price A, selling two calls at Strike price B and then buying one call at Strike price C. 

It has limited risk options and profit potential and is practised on assets whose underlying price is expected to change relatively less over a period of time. It is best for directional trades and can be traded upside or downside and also works best in non-directional markets as well.

Long Strangle

Long Strangle

The long strangle is a neutral strategy that involves buying a put and a call of the same asset and expiry date. A long strangle consists of one long call of a higher strike price and one long put of a lower strike price. It is used for a net cost and its profits if the asset rises above the upper break-even point or falls below the lower break-even point. The Upside profit potential is unlimited and substantial on the downside.

To conclude

Options strategies have picked up the pace in the crypto markets as it gives the trader the liberty to profit from an asset even without possessing it. You can purchase several calls and put contracts and hedge their risks while retaining the full benefits as if the asset of interest was in your possession. You can sift through many strategies including buying calls & puts, selling covered calls and buying protective puts. 

The advantages are huge if market prices move in your favour as you don’t trade and actual asset but its options. TradeDog has many products that span across Spot, options and futures markets so that you can limit your losses and be alarmed before making a wrong move. Visit our website and check out social channels to stay updated with these risk-limiting trading strategies.

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