Learn the basics of options trading, key terms, and benefits
As we are launching OKEx Options soon, we have prepared this article for you to grasp all the basics about options. Don’t miss out the quiz* at the end, as you can win rewards for getting all correct answers!
*Period: Dec 12–19, 2019 (UTC)
What are options?
There are only two types of options, namely, call option and put option.
When you expect the price of an underlying asset will rise, buy a call option. After the price goes up, you can buy the asset at your pre-determined price, which is lower than the market price.
On the contrary, if you expect the price will drop, buy a put option. After the price goes down, you can sell your asset at your pre-determined price, which is higher than the market price.
When a buyer wants to exercise an option within the period, the seller must sell it to the buyer. And when the buyer chooses not to exercise it, the seller does not need to pay anything in this case.
We will explain all the key terms of options trading below.
Key terms in options trading:
Call option: It gives the holder the right to buy an asset at a pre-determined price within a specific period.
Put option: It gives the holder the right to sell an asset at a pre-determined price within a specific period.
Expiration date: The date on which an option expires.
Option premium: The price paid by the buyer for an option contract. It increases as the market volatility increases.
Exercise price (or strike price): The price at which the buyer can buy or sell an underlying asset when exercising a call or put option respectively.
European Option: A type of contract that can only be exercised on its expiration date. (OKEx Options are European options).
American Option: A type of contract that can be exercised at any time before its expiration date.
Partial liquidation: No margin is required for buyers to hold a long position. Thus, partial liquidation will not occur due to the short of margin. Only the options sellers have to pay a margin due to their obligation to fulfill a contract. When a seller’s account balance drops below the maintenance margin level because of market volatility, partial liquidation will be triggered.
Contract naming: Every options contract is named in order of “underlying asset — expiry date — exercise price — contract type(call/put)”. For example, “BTCUSD-190830–10000-C” means that this is a BTC options contract expiring on Aug 30, 2019, with a strike price of USD10,000 and it is a call option.
How to trade OKEx options?
To get started, traders can either:
Benefits of options trading
Options provide leverage. Traders can buy a similar value of the underlying asset with a much fewer fund when compared to buying it on the spot market.
2. Reduced Risk
As buyers do not have to pay any position margin, the maximum loss of option buyers is the option premium. Also, it can help reduce risk exposure in the spot market by hedging against fluctuations of underlying assets prices.
3. More flexible
When investors are not 100% sure about the future trend of the crypto market, they can first allocate a small amount of funds to buy an option contract, which only involves little risk.
There are four kinds of strategies you can execute in options trading, including long call, long put, short call, and short put. Investors can trade options based on the movement of underlying assets, as well as the time and volatility, earning more returns with different investment strategies.
Basics of OKEx Options (take BTC/USD options as an example):
Test yourself with your options knowledge and get rewarded now!
We will draw 10 lucky users who answer all questions correctly to give away 10 USDK each. This quiz is open to OKEx registered users only. You’ll have to fill in your OKEx account EMAIL at the end of the quiz.
If you haven’t joined us yet, here’s your chance: http://bit.ly/OKExOptionsQuiz1
Click to start the quiz. Good luck!
Disclaimer: This material should not be taken as the basis for making investment decisions, nor be construed as a recommendation to engage in investment transactions. Trading digital assets involves significant risk and can result in the loss of your invested capital. You should ensure that you fully understand the risk involved and take into consideration your level of experience, investment objectives and seek independent financial advice if necessary.