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  • an option gives you the right but not the obligation to buy or sell an asset in the future at a specific price.

  • Let me say that again, an option is an option is your option to but not your obligation to buy or sell an asset at a certain price in the future.

  • And that optionality is what makes this different than just owning a Cryptocurrency or being short of Cryptocurrency asset.

  • There are some basic factors involved in the price of an option or what makes an option valuable.

  • And I want to talk about that right now.

  • First of all, the time period is really important.

  • If I own an option that expires tomorrow, it's gonna be worth a lot less than if I owe an option that expires in 30 days or a year.

  • Just look at what's happened to Bitcoin in the last year, it's gone up by five or 10 times the amount in price in a year.

  • Now you probably would have had a hard time predicting that.

  • Which means the longer you have as an option, the more value because there's more uncertainty.

  • And since you always have the option of exercising it, your downside is always completely limited by the premium you pay upfront.

  • And that's my second point that I want to talk about and that is the premium, the premium is the amount of money you pay to have that option.

  • It's also if you buy an option it's the maximum you're going to lose on a trade and that can help you manage your risk.

  • So again, the premium is the amount of money you pay to have that option to exercise in the future.

  • The next thing we want to talk about is a strike price.

  • And again I showed that document earlier about stock prices and I'll show it shortly, that's where we're gonna buy or sell that option in the future.

  • And then finally you have a call option or a put option, the call is the right to buy something.

  • The put option is the right to sell and let me quickly go through those right now.

  • And I'll show a diagram on the screen.

  • This is a diagram of being long a call option.

  • This is my right to buy something in the future.

  • And as you can see from this diagram when it comes to say Bitcoin.

  • For example, if I have the right to buy Bitcoin in the future and it goes to 100,000 double the current price.

  • Well, I'm gonna have a lot of upside, but if I choose not to exercise that option in the future, I'm gonna have a limited downside.

  • And that's why that graph spikes, if the price goes up and it stays fixed as the price goes down, that's the essence of a call option.

  • It's a very important thing to understand in contrary is a put option and you can see that diagram on screen, a put option means that someone has the right to sell that instrument in the future.

  • So you can see that for example, if Bitcoin goes to zero, you can see from this uh this diagram here that you've got a lot of potential profit or loss, if something drops in price, but if something goes up in price, it's actually quite limited because you're only going to exercise a put option if the price drops significantly.

  • So it's important to kind of understand these basics.

  • Again, in my in my defy Academy in module three in week three, all of my students go ahead and if it's legal in their area, buy a call option on ethereum and I have them do that, so they can just get a feel for what it's like to trade something like that, even if it's only a very small size.

  • Once you actually watch that thing and see it go in and out of the money, you can really have a feel for how that instrument can change rapidly in value when the price goes up or it can go to zero when the price goes down in the form of a call option.

  • So again, the best way to do this is to trade it.

  • And that's exactly what I teach in my academy, let's talk about strike price because you've probably heard these terms of an option being at the money in the money or out of the money and there's a diagram, I'll put here up on screen, that kind of shows what that means.

  • And let me give you an example Of where Bitcoin is right now about 51,000 if I have an own an option say a call option with a strike price of 51,000 that isn't at the money option.

  • It means right now if I exercise it, it's not worth anything.

  • Now if that strike price is Is lower than the current price of the option or that option is in the money it means if I exercise that right now I could exercise it and get a profit.

  • So say for example I owned a Bitcoin option struck at 50,000 it would be about $1,000 in the money.

  • That's an in the money option and of course and out of the money option Is an option that right now would expire worthless.

  • Say I owned an option right now a call option on Bitcoin at $60,000.

  • It's pretty far out of the money which means I'm only going to make money on that piece.

  • If Bitcoin happens to rally which it could.

  • So again, typically the more out of the money the option is, the cheaper it is, the more in the money an option is the more expensive it is and the more it actually behaves like the underlying instruments.

  • So that should explain that a little bit more, a little bit more that I want to talk about when it comes to pricing an option is we can look at something called the option value or what we call an intrinsic value.

  • So I'll stick this graph on screen here and this looks like a call option to me or an option where gains and value if you have the right to buy it in the future and we can see that there's an intrinsic value there, that hockey stick but there's actually a price of the option and that's because as long as the option still has time left it always is worth a little bit more than the underlying actual value of the option if I exercised it.

  • And that's the one final important lesson to understand about options.

  • Having the time is one of the most important issues with an option.

  • You always want more time with an option.

  • You know I would rather have an option that expires a week from now than a day from now because anything could happen tomorrow amazon could announce its accepting Bitcoin.

  • Apple Pay could announce that it's accepting Bitcoin and ethereum google could announce that it's accepting Bitcoin ethereum.

  • That press announcement could happen any day from now and let me ask you a question, would you like to be owning Bitcoin or ethereum or owning call options before that announcement or after that announcement.

  • It's a simple question.

  • My point is this there's a lot of volatility in these markets and the longer your option period, the more chance you have of making money off that option and since you've already paid the premium and you have a fixed downside, that's why we always want options that are longer, and we always want to understand that the more time we have for things to happen in the market, uh the more valuable our option becomes.

an option gives you the right but not the obligation to buy or sell an asset in the future at a specific price.

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A2 option price diagram call buy exercise

Call & Put Options 101 ? Strike Prices & Premiums

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    林宜悉 posted on 2021/09/22
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