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Key Takeaways:
A call option is an agreement that allows a buyer to predict that the value of an asset will appreciate, with an agreed-upon amount for a particular price and date to earn the premium.
With a call option, the buyer earns a premium based on the buy/sell call contract, particularly when the underlying asset increases in market value.
A crypto call option is a contract or tool that confers on a person the choice (rather than the obligation) to buy a specific asset at a preset price, on or before a certain time (known as the expiration date).
To buy a call option, the buyer must pay the seller a “premium fee.” Each crypto options contract comprises one cryptocurrency, bought at a predetermined price. You don’t have to own the particular underlying asset before you can buy or sell its corresponding call option. It should be noted that this transaction period lasts only for a specified time frame, as the buyer can only exercise their call on or before the expiration date.
If you predict an increase in the market share of an option, you can decide to buy the call option. If the underlying assets appreciates in price, and the current value surpasses the strike price before reaching the expiration date, it results in a profit after deducting the premium you’ve paid.
If, on the other hand, the underlying asset’s price depreciates, the buyer can allow the call option to expire, which may result in a loss of the option’s premium fee.
American-style options allow the holder to use or exercise the option anytime before the date of expiration, while European-style options can only be exercised on the date of expiration.
Crypto Call Options | Traditional Call Options |
Market runs around the clock | Market is typically open from Monday to Friday, from 9AM to 5PM |
Extremely volatile; fall and rise frequently in price | Less volatile, with few extreme swings in price |
The volatility of the crypto options market can be both a plus and minus for traders. If the market moves in favor of the options trader, they have the opportunity to profit handsomely from the difference between the strike price and crypto price. On the other hand, if the market goes against the options trader, they suffer a significant loss.
An options contract usually takes place between two parties: the options trader and the cryptocurrency exchange.
An option’s seller places the options contract on the cryptocurrency exchange, with a specific price and expiration date. An interested buyer is then located and linked with the order on the options market.
To ensure transparency, the cost of the premium paid is calculated using different parameters — e.g., the time remaining before expiration, market price, and volatility of the underlying asset alongside the interest rates.
An option is said to have intrinsic value if it’s still valuable at the point of expiration.
Suppose the market price of a particular option is $90. The buyer holds a call option with a strike price of $70 at a premium fee of $5. The option has intrinsic value and is said to be “in the money” (ITM) because, at expiration, the buyer can buy 100 shares at $70, instead of the current market price of $90.
Intrinsic value can be calculated as follows:
Intrinsic Value = Price of Underlying Asset − Strike Price
In this case, $90 − $70 = $20 gross profit. This simply implies that the option has an intrinsic value of $20 per share.
Similarly, the call option is referred to as “out of the money” (OTM) if it possesses no intrinsic value at expiration.
Going by the above example, if the same stock price drops to $50, it would hold no intrinsic value as no buyer will purchase it for $70 when the market’s current price is $50. This renders the option valueless. The call seller only gets the premium paid ($5).
Aside from ITM and OTM, there’s a third possibility called “at the money” (ATM). An asset is said to be ATM when both the present market price and strike/fixed price are equal.
Let’s look at Bybit European-style options to illustrate. Contract type: BTC-29MAR2024-68000-C is a BTC call option with a strike price of $68,000, which will expire on Mar. 29, 2024.
The market price of BTC at the start of March is $50,000. Jenny thinks the price of BTC will be much higher at the end of the month, while Bob believes that BTC’s price will decrease.
Let’s take the following option:
Type: Call
Strike Price: $68,000
Expiration Date: Mar. 29, 2024
Underlying: BTC
Jenny buys a BTC call option for $1,200. This means she has the right to buy 1 BTC at $68,000 when the contract matures. Bob sells call options.
Scenario A: Upon expiration, BTC’s settlement price increases to $71,000.
Buy Call: Jenny exercises her call option and makes a $3,000 profit (i.e., $71,000 − $68,000). Minus her $1,200 premium paid, she’s pocketing a profit of $1,800.
Sell Call: Bob needs to fulfill his obligation to sell the option at a strike price of $71,000, and he loses $3,000 (i.e., 71,000 − $68,000). Deducting the $1,200 premium he receives, Bob’s total loss is $1,800.
Scenario B: Upon expiration, BTC’s settlement price dips to $48,000.
Buy Call: In this case, Jenny loses $1,200 (the premium she paid for the call option).
Sell Call: Bob doesn’t need to perform his obligations, and earns a premium of $1,200.
Options trading often involves predefined losses (limited to the premium paid), whereas spot trading exposes traders to potentially unlimited losses if the market moves significantly against their position.
However, the complexity and limited time frame of options can make them risky for inexperienced traders. Always do your research and have proper risk management in place before diving into a new trading product.
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