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. Leverage: Options allow you to control a larger position with a relatively small investment.

  2. Flexibility: They can be used in various strategies, whether you want to hedge, speculate, or increase income.

  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.

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