Crypto Options Trading: The Top 10 Strategies

There are many options strategies in crypto that both limit risk and maximise return. Learn how to take advantage of the flexibility and power they can provide.

Jan 12, 2022

Defi Opt Trading 10strategies

Key Takeaways:

  • The main types of crypto options are calls and puts. They can be combined in different ways to create trading strategies.
  • From covered calls to iron butterflies, crypto options strategies can help to potentially limit risk and maximise returns under different market scenarios.

While crypto options are commonly seen as complex trading tools, there are many strategies that a trader can utilise to help limit risk and maximise return. Here are 10 common options strategies that every crypto trader should know.

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Read about crypto derivatives, options, and futures in this introductory guide.

1. Covered Call

A covered call involves buying an asset and shorting a call on that asset. The strategy is often employed when the asset’s price is not expected to move much. The short call allows for the receiving of some income (i.e., the option premium). The trade-off is that the trader must be willing to sell the asset at a set price (i.e., the short call strike price).

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For example, suppose a trader is using a call option on an asset that represents 100 units of that asset per call option. For every 100 units of asset the trader buys, one call option would simultaneously be sold against it. In the event the price increases and the call is exercised, the trader’s short call obligation is covered by the long asset position.

2. Protective Put (Married Put)

In this strategy, a trader simultaneously purchases an asset and put options for an equivalent number of associated units of the same asset.

A trader may choose to use this strategy as a way of protecting their downside risk when holding an asset. This strategy functions similarly to an insurance policy, establishing a price floor in the event that the asset’s price falls sharply.

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3. Protective Collar

A protective collar strategy consists of a long position in an asset, plus simultaneously purchasing a put option and selling a call option. The underlying asset and expiration date must be the same, and both put and call are typically Out-of-the-Money (OTM). This strategy is often used by traders after a long position in an asset has experienced substantial gains. It allows traders to have downside protection as the long put gains when the asset price drops. However, the trade-off is that the short call caps potential further gains if the asset price rises.

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4. Long Call Spread

This is a type of vertical spread strategy that involves the simultaneous buying and selling of options of the same type (puts or calls) with the same expiration date but a different strike price.

In a long call spread strategy, a trader simultaneously buys calls at a specific strike price while also selling the same number of calls at a higher strike price. Both call options have the same expiration date and underlying asset. This type of vertical spread strategy is often used when a trader is bullish on the underlying asset and expects a moderate rise in its price. Using this strategy, the upside is somewhat limited, but the net premium spent should be reduced (compared to just buying a call).

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5. Long Put Spread

The long put spread strategy is another form of vertical spread. In this strategy, the trader simultaneously purchases put options at a specific strike price while also selling the same number of puts at a lower strike price. Both options are purchased for the same underlying asset and have the same expiration date. This strategy is commonly used when the trader has a bearish sentiment about the underlying asset and expects the asset’s price to decline. The strategy offers both limited losses and limited gains.

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6. Long Straddle

A long straddle options strategy occurs when a trader simultaneously purchases a call and a put option on the same underlying asset with the same strike price and expiration date. A trader often uses this strategy when they believe the price of the underlying asset will move out of a specific range, but they are unsure of which direction the move will take. At the same time, the maximum loss the trader may experience is limited to the cost of both options contracts combined.

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7. Long Strangle

In a long strangle options strategy, the trader simultaneously purchases an Out-of-the-Money (OTM) call option and an OTM put option on the same underlying asset with the same expiration date. A trader who uses this strategy believes the underlying asset’s price will experience a very large movement, but is unsure of which direction the movement will go. Strangles are usually less expensive than straddles because the options purchased are OTM options.

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8. Long Call Butterfly Spread

A butterfly spread is an options strategy combining bull and bear spreads with a fixed risk and capped profit.

In a long butterfly spread using call options, a trader combines both a bull spread strategy and a bear spread strategy. They also use three different strike prices. All options are for the same underlying asset and expiration date.

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9. Iron Condor

In the iron condor strategy, the trader simultaneously holds a bull put spread (sells one Out-of-the-Money (OTM) put and buys one OTM put of a lower strike) and a bear call spread (sells one OTM call and buys one OTM call of a higher strike). All options have the same expiration date and consist of the same underlying asset. Typically, the put and call sides have the same spread width. This trading strategy earns a net premium on the structure and is designed to take advantage of an asset experiencing low volatility. Many traders use this strategy for its perceived high probability of earning a small amount of premium.

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10. Iron Butterfly

An iron butterfly strategy is similar to the iron condor because the trader sells a put and buys another put at different strike prices (and simultaneously with calls, as well). All options have the same expiration date and consist of the same underlying asset.

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Final Words — Trading Crypto Options

These strategies are commonly used on options trading platforms, such as the Exchange. Alternatively, for those looking for more insights on options, our article Managing Options With Greeks describes this vital risk management tool for options traders.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by to invest, buy, or sell any digital assets. Returns on the buying and selling of digital assets may be subject to tax, including capital gains tax and/or income tax, in your jurisdiction or the jurisdictions in which you are a resident for tax purposes. Any descriptions of products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.

In addition, the Exchange and the products described herein are distinct from the Main App, and the availability of products and services on the Exchange is subject to jurisdictional limits. Before accessing the Exchange, please refer to the following links and ensure that you are not in any geo-restricted jurisdictions for Spot Trading and Margin Trading

Past performance is not a guarantee or predictor of future performance. The value of digital assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a digital asset, it’s essential for you to do your own research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.

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