A common question in the crypto market is what are crypto options and why investors should consider them. This article will explore the basic mechanics of options, how they work, how they benefit both an individual and a company, and the types of companies that can create options.
Options are confidential derivatives contracts that give holders control over some aspect of a company’s future performance without owning it. For example, a call option gives the holder control over 100 shares of stock in a company; If the price of a call option rises above the strike price, then it can be exercised by the holder. If it falls below the strike price, then the option expires.
Exercise
When crypto options are exercised, investors opt to pay to acquire whatever they have control over with their options. For example, if an investor purchased a call option for 20% above the market price of a stock, that could rise 20% by the end of the year. It would be exercised if the market price rose to 20% above that strike price in December. If it did not rise by 20%, it would expire and become worthless.
Strike Price
The strike price is the fixed or variable pricing level set during an option creation. This will determine the amount the option holder can gain or lose from an increase or decrease in stock value.
Premium/Discount
The premium is how much an option cost at creation. The discount is how much the price of an option has dropped since its creation and expiration date. For example, on Dec 18th, a call option created for $1.00 will have a premium of $0.10 and a discount of $0.90 if it expired on December 18th, 2017.
Synthetic Options
Synthetic options are created by combining the investment and borrowing of multiple options. This allows an investor to gain from movements in the price of an asset without actually owning it. Synthetic call options are created by borrowing an Underlying Stock, selling a Call Option, and buying a Protective Put Option.
This is when a traditional option is created with the intent to give the investor some of the upsides without any of the downsides. Several strategies can be used to create synthetic options, such as straddles, spreads, and combinations. Any combination of these strategies can be used to create a synthetic option.
How Do Options Benefit An Individual?
Since options are long-term investments, they are safer than short-term investments. If the price of a stock falls below the strike price, the investor will lose their entire investment. However, options typically last six months to a year and can be held until just before expiry. Through this method, investors can only lose the amount that they invested and not more.
How do options benefit a company?
Options can be utilized to increase the value of your asset. For instance, if you have created an option that gives you control over 100 shares of stock in a company but is currently trading for $1.00, your company’s value will be x amount above that number on Dec 18th, 2017. Options can be used in all types of financial deals.
Options are very versatile and can be used by any company with a certain amount of volatility. For example, A company with steady revenue but a high stock price could create an option for the future value of the company’s revenue. The result would earn them revenue while waiting for the stock price to rise above the strike price.
Types of Companies That Create Options
Two main types of companies create crypto options: STOs and ICOs.
STOs are Security Token Offerings. This new way to raise funds for a company is often done by creating an instrument known as a security token that can be traded on an exchange. Because STOs are publicly traded securities, many investors will want to participate in this offering. Options can be used in this investment opportunity because options are very versatile and can provide the same type of return using another investment vehicle.
ICOs are Initial Coin Offerings. This is a way to raise funds for a project by offering token coins to investors. Blockchain startups can benefit from creating options because ICOs may not be profitable initially, and investors may want a steady return on their investment by using an option.
How To Create Options
There are three main ways to create options: STOs, ICO, and other traditional financial instruments.
STOs can be used to raise funds for a new project, and trading these new financial instruments will attract investors who want the newest and trendy investment. Options can be used by companies with a steady flow of revenue but high volatility, which is why many cryptocurrency startups, who are also blockchain startups, may want to create options.
ICOs are often used to raise funds for a project, and companies will usually launch their token coin or digital asset to allow investors to buy it. This is an excellent way for investors to buy these assets, and it is simple for anyone to purchase them using any cryptocurrency or fiat. Companies can create their option, and they can be used to allow their investors to either make some money or lose their investment entirely.
Almost any traditional financial instrument can be used to create options. They are not restricted to just the ones that are mentioned above. Options can create the same type of investing opportunity, regardless of the type of financial instrument.