What Is the Primary Purpose of Using Crypto Options for Hedging?
Hedging with crypto options aims to mitigate the risk of adverse price movements in an existing crypto portfolio. For example, a holder of Bitcoin can buy a put option to protect against a significant price drop.
If the price falls, the profit from the put option offsets the loss on the underlying Bitcoin. This allows the investor to maintain their long-term crypto position while limiting downside exposure.
Glossar
Protective Put Strategy
Tactic ⎊ The Protective Put Strategy involves purchasing put options on an asset currently held in a portfolio to safeguard against potential depreciation in its market value.
Crypto Options
Valuation ⎊ Crypto options, representing rights ⎊ not obligations ⎊ to buy or sell a cryptocurrency at a predetermined price before an expiration date, derive valuation from underlying asset price, time to expiry, volatility, and prevailing risk-free interest rates; models like Black-Scholes, adapted for crypto’s unique characteristics, are frequently employed, though parameter estimation presents challenges due to nascent market data and potential for manipulation.
Primary Purpose
Intent ⎊ The primary purpose underpinning cryptocurrency derivatives, options trading, and related financial instruments revolves around risk management and speculation, often intertwined.
Covered Call Strategy
Mechanism ⎊ A covered call strategy, within cryptocurrency derivatives, involves holding an underlying asset while simultaneously selling a call option on that same asset, generating premium income.