When it comes to crypto lending, there may come a time when the price of your crypto goes up or down at the end of the loan. In this situation, call and put options are put into play to help ease the process along. But what are these options and what do they entail?

 

What are options?

 

‘Options’ are contracts that grant the bearer the right – though not the obligation – to either buy or sell a certain amount of an underlying asset at a set price. Alternatively, prior to the contract’s expiration. Options are purchasable in a similar vein as other asset classes with brokerage investment accounts.

 

Options are capable of enhancing a person’s portfolio, doing so with additional income, protection, and leverage. Depending on the circumstances, there is typically an option situation that is relevant to an investor’s goal. A common example would be utilizing options as a sufficient hedge against a dwindling stock market to hinder downside losses. Options can be effective in generating a recurring income. Moreover, they are frequently used for speculative purposes like wagering on which direction a stock will go.

 

A call option is bought when the trader anticipates a rise in the price of the underlying asset within a certain period of time. Think of it as a down-payment for a future purchase. A put option, on the other hand, is purchased should the trader expect the price to drop within a specific time frame.

 

How they work

 

In regards to valuing option contracts, it all boils down to determining the probabilities of future events in price. The higher the chances that something will occur, the more costly an option would be that generates a profit from the event. For example, a call value rises as the underlying stock also increases. This is important for understanding the basic value of options.

 

The less time there is until reaching expiration, the less an option will have in terms of value. This is due to the declining likelihood of a price move in the underlying stock as the date of expiry draws nearer. This is primarily why an option is seen as a “wasting asset.” If you purchase a one-month option that is void of money, and the stock fails to move, the option will become less valuable as days go by.

 

Time is a key component to an option’s price, so a three-month option is more valuable than a one-month option. The reason for this is that, with more available time, the chances of a price move being in your favour are high, and vice versa.