We have all heard stories of crypto traders losing over 50% within weeks or even days. This is what happens when amateurs do not know how to control risk. Options when used correctly can help you combat crypto market volatility and even profit from it. I am going to share 3 strategies that professionals use daily.
Sell Calls to enhance earnings
Selling call options can enhance your earnings and mitigate against losses. When you sell a call option, you give the buyer the right to buy your crypto asset at the strike price on the expiry date. You will be paid an instant premium that’s yours to keep.
For example: Sell a 1 ETH/USD call option with a strike price of $300 for 14 days
You will receive ~$3.00 from the Instant Premium up front and its yours to keep. If the price of ETH falls to $220, the Instant Premium would offset some of the loss. However, if the price of ETH rises to $300, the Instant Premium would boost your profit beyond $50.
The key point is that the Instant Premium is yours to keep regardless. You can treat it as income or use it to buy protection for the portfolio. The next example will deal with protection.
2. Buy Puts to protect your assets
Put options are used to protect positions or to make speculative bets. When you buy a put, you profit when the crypto asset drops in value. You will have the right to sell a crypto asset at the strike price on the expiry date. This is an incredibly powerful tool.
For example: Buy a 1 ETH/USD put option with a strike price of $200 for 14 days
You will pay $2.00 for the Instant Premium up front and that’s your maximum loss. As long as the price of ETH falls below $198, you will profit.
For example, if the price of ETH falls to $190, you will enjoy a profit of $8. That’s an astounding 4X return on a $2 outlay with no collateral required!
The biggest advantage of buying a put instead of shorting is that your losses are limited to the cost of the Instant Premium. In the example above, your maximum loss would be $2.
It is important to note that there is no “perfect” strike price or expiration date that suits everyone. This is why Sparrow allows users to customize their options according to their needs.
You should set a strike price that matches your risk tolerance and market bias. The strike price will lock-in a minimum value on the assets in your portfolio. This will help you achieve true portfolio protection at a fixed cost.
3. Collar (Sell Call + Buy Put) for low cost hedging
Options can be expensive when the market is volatile. Buying a put may cost more than most are willing to pay. A Collar is an easy way to reduce those costs significantly.
A Collar is a combination of the two earlier strategies. To build a collar, you should sell a call above the market price and buy a put below the market price.
This is how the collar works. Buying the put option protects the assets from downside risk, but you have to pay an instant premium. Selling the call option earns you an instant premium. When done together, we use the instant premium from selling the call to offset the cost of buying the put.
The collar can be established for minimal or no cost at all. In the example above, you have protection from any price movement below $200 and your net cost is actually a profit!
It all depends on where you place your strike price and expiration. But there is no such thing as a free lunch. Selling a call may limit your profit potential. However, it will reduce the cost of protection even when markets are rough. You need to decide which trade-off works for you.
Conclusion
Any of these strategies can help you combat rough markets. A lot depends on market conditions, risk appetite, and your budget. Plan well for each scenario and soon you will be trading with a lot more confidence.
Now you know the secrets of professional traders. Tell your best friends only ;)
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The author, Adrian Tan is the CIO of Sparrow, leading options trading platform empowering institutions and individuals to trade Bitcoin and Ethereum options that are settled by smart contract.
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