Options Primer

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Overview of Crypto Options

Cryptocurrency options are financial derivatives that give traders the right - but not the obligation - to buy or sell an underlying cryptocurrency at a predetermined price (i.e. the “strike price”) on or before a specific date. DOPP offers European style, physically-settled crypto options for Bitcoin (BTC) and Ethereum (ETH), and other tokens, providing traders with increased flexibility and risk management tools in the cryptocurrency markets.

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Premium

The premium is the price that the buyer of an option pays to the seller for the right to exercise the option. The premium is determined by various factors such as the strike price, time until expiration, current market price of the underlying asset, and volatility. In the case of DOPP’s crypto options, premiums are denominated in USD, unless otherwise illustrated.

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Call Options

A call option is a type of crypto option contract that gives the buyer the right, but not the obligation, to purchase the underlying cryptocurrency at a specified strike price on or before the expiration date. Call options are generally purchased when a trader believes that the price of the underlying cryptocurrency will rise, allowing them to potentially profit from the difference between the strike price and the market price at the time of exercise.

Example of a Call Option

Suppose a trader buys a BTC call option with a strike price of $50,000 and an expiration date one month from now. If the price of BTC rises to$55,000 before the expiration date, the trader can exercise the option to buy BTC at $50,000, effectively profiting from the$5,000 difference, minus the premium paid and any slippage or transactions costs on the trade.

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Put Options

A put option is a type of crypto option contract that gives the buyer the right, but not the obligation, to sell the underlying cryptocurrency at a specified strike price on or before the expiration date. Put options are generally purchased when a trader believes that the price of the underlying cryptocurrency will fall, allowing them to potentially profit from the difference between the strike price and the market price at the time of exercise.

Example of a Put Option

Suppose a trader buys an ETH put option with a strike price of $3,000 and an expiration date one month from now. If the price of ETH falls to$2,500 before the expiration date, the trader can exercise the option to sell ETH at $3,000, effectively profiting from the$500 difference, minus the premium paid and any slippage or transactions costs on the trade.

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European Style Options

DOPP offers European style options, which can only be exercised on the expiration date. This is differs from American style options, which can be exercised at any time before the expiration date. European style options are advantageous for traders who want to minimize early exercise risk and focus on price movements up until the expiration date. Option positions can still be closed before expiry though by trading them in the open market.

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Still have questions?

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