Options are a great way to unleash the bull inside of you and speculate on the value of cryptocurrencies. Options are much more diverse and flexible compared to simply holding a bag. For instance, you can use them to minimize risks and hedge yourself from flash crashes or ensure you don’t miss out on the next leg up. Hedgey offers puts and calls trading. You can buy or sell them. But what does that all mean? Is buying a call bullish? What about selling one? This FAQ entry will answer these questions.
If you are curious about bearish strategies, make sure to read our other FAQ entry about Bearish Options Strategies.
Bullish strategies
Traders use bullish options trading strategies when they expect the underlying assets to rise in value. When you are bullish on a certain token, you need to have an idea of how much the token price will rise and when you think the rally will occur. Oftentimes people buy a call when they think a token will rise in value, but selling a put (writing a put) is also a possibility.
Buying a call
Traders have multiple reasons to buy a call. But to remain to the point, traders buy a call when:
- They are “bullish” or confident about a token price going up, but they don’t want to lose their money if it dumps instead (risk mitigation)
- They want to utilize leverage to take advantage of rising prices
The graph below illustrates the risk mitigation buying a call offers. Because a call gives you the right to buy a token, a call limits the downside potential to just the premium. You still get all the upside potential without the downside risk. This concept is the key difference with simply buying a token, as you could get stuck with a token that lost significant value if it dumps. A call gives you the option not to exercise it and leave the bag to the call seller.
Writing / Selling a put
Traders have multiple reasons to sell a put. But to remain to the point, traders sell a put when:
- They are confident a token price remains stable or goes up
- They are willing to write “insurance” contracts to others in the market to collect premiums
- They are willing to buy the token at a certain price and collect a premium for it
The graph below illustrates these concepts. If you sell a put, you collect a premium. As long as the crypto price remains relatively stable, you have made a profit. Because a written put gives you the obligation to buy a token, you might get stuck buying a token that has significantly lowered in value if the value dumps. In that case, you have “insured” someone from losses by buying their tokens at the strike price. That’s why you should always consider if you are willing to buy the token at that entry point before writing a put.
Summary
You buy a call when you feel bullish about a token, and you want to profit from the token’s value increase while minimizing the downside risks. You sell a put when you believe the token price will rise or remain stable, and you are willing to collect a premium for that bet or when you want to get paid for entering a position.
