Options are a great way to unleash the bear inside of you and speculate on the value of cryptocurrencies. Options are much more diverse and flexible compared to simply holding a bag. For instance, you can use them to minimize risks and hedge yourself from flash crashes or ensure you don’t miss out on the next leg up. Hedgey offers puts and calls trading. You can buy or sell them. But what does that all mean? Is buying a put bearish? What about selling one? This FAQ entry will answer these questions.
If you are curious about bullish strategies, make sure to read our other FAQ entry about Bullish Options Strategies.
Bearish strategies
Traders use bearish options trading strategies when they expect the underlying assets to drop in value. When you are bearish on a certain token, it is important for you to have an idea of how much the token price will drop and when you think the dump will occur. Oftentimes people buy a put when they think a token will drop in value, but selling a call (writing a call) is also a possibility.
Buying a put
Traders have multiple reasons to buy a put. But to remain to the point, traders buy a put when:
- They are bearish or confident about a token price going down but they don’t want to sell their tokens now. They rather want a guarantee that they can sell their tokens at a certain price. That way they can sell when the token dumps, but they can keep holding if the token moons instead.
- They want to utilize leverage to take advantage of falling prices
The graph below illustrates the benefits a put provides. If you sell a certain cryptocurrency, you lose exposure which results in lost potential profit when the crypto price rises. Because a put gives you the right to sell a token, a put limits your lost potential profit to the premium. However, if the token dumps, you can sell your tokens for the strike price. In other words, you are hedged against the downside moves of a token while not missing out on the upside if it moons instead.
Selling a call
Traders have multiple reasons to sell a call. But to remain to the point, traders sell a call when:
- They are confident a token price remains stable or goes down
- They are willing to sell their tokens at a certain price while collecting a premium for it
The graph below illustrates these concepts. If you sell a call you collect a premium, as long as the crypto price remains relatively stable you have made a profit. Because a written call gives you the obligation to sell a token, you might get stuck selling a token that has significantly increased in value, if the token value moons. So it is important to determine whether you want to sell your tokens at that price should the call contract be exercised.
Summary
You buy a put when you feel bearish about a token and you want to profit from the token’s value decrease, while not missing out on the upside potential if you own the bag when it moons. You sell a call when you believe the token price will drop or remain stable and you are willing to collect a premium for that bet. You also sell a call when you want to sell a token at a certain price and you want to collect a premium on top of it.
