Comment on page

Options Basics

What are Options?

Technical Explanation

Options are financial derivatives that provide the holder the right, but not the obligation, to buy or sell an asset at a predetermined price, called the strike price, within a specific time frame. There are two main types of options: Call Options and Put Options.
  • Call Options give the holder the right to buy an asset at a specified price by a specified date.
  • Put Options give the holder the right to sell an asset at a specified price by a specified date.

Why Trade Options?

Trading options can offer several benefits:

  1. 1.
    Leverage: Options allow you to control a larger position with a relatively small investment.
  2. 2.
    Flexibility: They can be used in various strategies, whether you want to hedge, speculate, or increase income.
  3. 3.
    Limit Potential Loss: The maximum loss for option buyers is limited to the premium paid.

A Few Different Example Scenarios

Let’s say you don't have enough funds to buy a large amount of $OPT but believe its price will rise, you can buy Call Options. This way, with a smaller investment (the premium), you get more exposure than simply buying $OPT and you gain a higher potential Return-On-Cash (ROC) with your Long $OPT Call Options.
If you anticipate that the $MILK token's price (6.938 at the time of this writing) will increase in value within a few months, consider purchasing a Call Option with a strike price of 7 ADA that expires in 90 days. Should $MILK's price surpass 7 ADA by the expiration, you'll have the advantage of acquiring $MILK at the locked-in price of 7 ADA, regardless of its current market value, even if it's at 10 ADA.
Conversely, if you expect the price of $OPT to decline, you might purchase a Put Option with a strike price of 0.5 ADA. Should $OPT's price decrease to 0.3 ADA, you can exercise your Put Option, selling $OPT at the set price of 0.5 ADA, even though its market value is only 0.3 ADA.