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Option Advanced Phase III:How to choose a trading strategy?



How to choose a call option strategy

You should know that call options are similar to long positions in futures trading. Take BTC as an example. If you thought the price of BTC will rise in the future, you would choose to buy BTC call options.


Let's first understand the knowledge points about options trading.


1. The breakeven price of MoonXBT call options

For MoonXBT call options that use USDT as collateral, you may remember the breakeven price = the Strike Price + the Premium Paid


Take the following as an example:

The breakeven price of a Bitcoin call option with a strike price of 35,000 USDT and a premium of 1000 USDT is 36000 USDT:

Breakeven = (Strike Price + Premium Paid)

Breakeven = (35000 USDT + 1000 USDT)

Breakeven = 36000 USDT


The above example means that if the Bitcoin price is 36000 USDT when the option expires, the trade will have broken even, leaving your USDT balance unchanged. You did not create a profit or suffer any losses.


2. leverage

In the above example, the premium you paid to purchase the BTC option was 1000 USDT, with a strike price of 35,000 USDT, which means the inherent option leverage was 35x.

1000 x 35 = 35,000

3. Maximum potential profit or loss

It’s always advantageous to know the maximum potential profit or loss of any option you’re thinking of purchasing.


The chart below shows the USDT profit and loss for a MoonXBT call option. The distance between the lines and the x-axis for prices below the strike price equals the premium paid. And the PNL lines for prices above the strike price are calculated using the profit or loss formulas we just covered.


The buyer of a MoonXBT call option will suffer their maximum loss when the underlying price at expiry is below the strike price. When this is the case, they lose the premium they paid for the option, but nothing more.


Summary:

If you think the market will go up, you should trade with MoonXBT call options. To master trading MoonXBT call options, you should know your breakeven price for MoonXBT call options and the following:


1. MoonXBT call options can provide high inherent leverage.

2. MoonXBT call options can control the risk to a fixed amount.

3. MoonXBT call options can increase potential earnings.


How to choose a put option strategy

Put options work the other way round and are comparable to short positions in futures trading. The primary strategy of trading put options is: If you believe the price of BTC will fall in the future, you should choose to buy BTC put options.


The buyer of a Bitcoin put option, for example, is purchasing the right to sell Bitcoin at a specific price in the future.

Similar to call options, three points need your attention.


1. MoonXBT put option Breakeven price

For MoonXBT put options that use USDT as collateral, you may remember the breakeven price equals the strike price minus the premium paid.


Put Option Breakeven price = Strike Price - Premium Paid

Take the following example:

The breakeven price of a Bitcoin put option with a strike price of 35,000 USDT and a premium of 1000 USDT is 34000 USDT

Breakeven = (Strike Price - Premium Paid)

Breakeven = (35000 USDT - 1000 USDT)

Breakeven = 34000 USDT


The above example means that if the Bitcoin price is 34000 USDT when the option expires, the trade will have broken even, leaving your USDT balance unchanged. You did not create a profit or suffer any losses.


2. leverage

In the above example, the premium you paid to purchase the BTC option was 1000 USDT, with a strike price of 35,000 USDT, which means the inherent option leverage was 35x.

1000 x 35 = 35,000


3. Maximum potential profit or loss

Knowing the maximum potential profit or loss of any option you’re considering purchasing is always advantageous.

The chart below shows the USDT profit and loss for a MoonXBT put option. The distance between the lines and the x-axis for prices below the strike price equals the premium paid. You can use the profit or loss formulas we covered to calculate the PNL lines for prices above the strike price.


The buyer of a MoonXBT put option will suffer their maximum loss when the underlying price at expiry is above the strike price. When this is the case, they lose the premium they paid for the option, but nothing more.


If the underlying price at expiry is below the strike price, they can get unlimited profits, depending on how far the underlying price is below the strike price.


Summary:

If you believe the market will go down, you should trade with MoonXBT put options. To master trading MoonXBT put options, you should know your breakeven price for your MoonXBT put option and the following:


1. MoonXBT put options can provide high inherent leverage.

2. MoonXBT put options can control the risk to a fixed amount.

3. MoonXBT put options can increase potential earnings.


How do you master trading MoonXBT options in a bull market?

From previous content, you know that if you are bullish on the market, you should buy call options, and if you are bearish, you should buy put options. Now that you are clear on these basic rules, we can cover ways to maximize gains in a bull market.


Considering the volatility inherent in the cryptocurrency market, traders are always looking for ways to defray the risks of price movements that negatively impact them. In the options world, If you think the following market could be a bull market, these three main trading strategies will allow you to make more money while taking the appropriate risk.


1. Buy and open out-of-the-money options

First, you should know what out-of-the-money options are?

An out-of-the-money option (OTM) has a strike price that the underlying security has yet to reach, meaning the option has no intrinsic value. If exercised, the owner of an OTM call option would pay more than the current market value for the underlying asset. The owner of an OTM put option would sell for less than the current market price of the underlying asset.


After buying a call option contract, if the market continues to rise as expected, investors can choose to buy an out-of-the-money call option contract. The idea is to add more leveraged options contracts to maximize returns.


2. Make hedging transactions

After buying a call option contract, once the market has risen for some time, it may fall. At this time, investors can buy a put option to hedge the possible downside risks of their call option. The critical point of this strategy is to know when to start hedging, which requires traders to have experience and technical analysis skills.


3. Bull call spread option

This strategy involves buying a call option, which gives you the right to buy a particular stock for a defined strike price, and simultaneously sell a call option on the same stock with the same expiration date but with different strike prices. The strike price on the call option you sell is higher than the strike price on the call option you buy. This is essentially a way to take a long position while covering some of your costs.

One thing should be noted, the bull market spread is established on the assumption that investors expect a bull market by first buying a call option and then selling a call option with a higher strike price.


Taking BTC options as an example, suppose the current price of BTC is $47,550.

First, buy a call option with a strike price of $50,000 (option A) and a premium of $155. Then sell a call option with a BTC strike price of $60,000 at $1.53.

  • If the bull market unfolds as expected, between $50,000 and $60,000. Then the total profit is the profit earned by option A + the return from option B.


  • If the bull market unfolds better than expected, the price rises above $60,000. In this case, option B would be at a loss, but option A would be in profit, with a higher total yield than the loss of option B. The final total return is the difference between the two options (it remains constant no matter how much you increase it) and the $1.53 option premium.


  • If the bull market does not come, then the option premium for buying BTC-50000-C will be all lost, but you can still get back the 1.53$ invested principal ( the profit of BTC-60000-C sold).

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