Key Takeaways:
- UpDown Option positions automatically close if the underlying asset price touches a predetermined ceiling or floor price.
- The potential benefits of trading UpDown Options include built-in protection via clearly stated floor and ceiling prices, automatically taking profit and potentially limiting losses, gaining full price exposure to an asset at a fraction of its price, and facilitating hedging for specific needs.
- Users can choose between narrow and wide contract ranges in BTC UpDown Options. With a wider difference between Stop and Target price, there’s a lower likelihood of the contract being knocked out, which can increase the lifespan of the contract in volatile markets.
- However, UpDown Options can potentially limit one’s profits, as well. Additionally, for traders who want to keep their position open for a longer time, there is the risk of positions being closed out early in volatile markets.
What Are UpDown Options?
An UpDown Option is a special type of option that automatically terminates if the underlying asset’s price hits a predetermined ceiling or floor (up or down) price. These prices are also sometimes referred to as the barrier price.
This is not to be confused with the strike price, which is the price at which the option holder buys or sells the asset if they exercise their right to do so. With UpDown Options, there’s the potential to limit both profits and losses because of the Target and Stop prices, which we look at below.
Traders can choose to buy or sell an UpDown Option depending on which direction they believe the market will go.
- If they think an asset’s price will increase, they can buy an option to open a long position.
- If they think the asset’s price will decrease, they can sell an option to open a short position.
When buying an option, the ceiling price is the level that automatically takes profit (i.e., the Target). This potentially helps prevent a trader from holding onto a trade for too long and risking the trend reversing. The floor price is the level that prevents a trader from incurring additional losses (i.e., the Stop).
When selling an option, the reverse is applicable. The ceiling price limits potential losses (i.e., the Stop), while the floor price represents the maximum profit potential (i.e., the Target).
New to UpDown Options? Learn more in our intro article.
Understanding Contract Range in UpDown Options
This section introduces UpDown Options traders to contract range, and the pros and cons of setting wide vs. narrow ranges.
What Is Contract Range?
A contract range on UpDown Options represents the difference between the Target price and Stop price within the contract. A wider range means a larger difference between the Stop and Target price, while a narrow range means that the Stop and Target prices are closer together.
Benefits of a Wider Range Contract
A wider range offers advantages over a narrower range:
- Extended Contract Lifespan: Wider range can increase the probability of a position to remain open during price fluctuations, allowing traders to increase the likelihood of hitting the Target price during favorable market movements.
- Increased Profit Potential: Wider ranges can yield higher profits if the price prediction is correct. With more distance to the Target price, there’s a higher return available, which can be attractive to traders looking for significant gains.
Below is an example of how a wide and narrow contract range compare:
In this example, there are two different contracts available to trade:
| Contract A: Target Price = $62,400 Stop Price = $61,900 Contract Range = $500 | Contract B: Target Price = $63,600 Stop Price = $61,600 Contract Range = $2,000 |
|---|
*Contract Range = Target Price – Stop Price
We are assuming the user has a bullish outlook on the token price and decides to open a long position.
When the market price fluctuates and reaches $61,800, Contract A will be knocked out at a loss. In contrast, Contract B, with a wider range, remains open, allowing the trader to continue capitalizing on their bullish sentiment and increasing the likelihood of hitting the Target price.
Understanding Tick Value and Tick Size
Each UpDown Option contract comes with a different tick size and tick value. The tick size is the smallest increment a price can move in any market, while the tick value is the value (in USD) of a tick size of the UpDown Options contract.
The ratio of tick value/tick size corresponds to the unit of the underlying assets in one unit of a derivatives product. For example:
- If BTC UpDown Options has a tick size of 1 and tick value of 1, for every $1 move in the price of BTC, the BTC UpDown Options contract value will move by $1, as well.
- If BTC UpDown Options has a tick size of 1 and tick value of 0.5, for every $1 move in the price of BTC, the BTC UpDown Options contract value will move by $0.5.
Setting a Stop Loss to Minimize Risk
In UpDown Options contracts, the user’s maximum loss is the amount they pay to open a position. However, they can customize their Stop Loss to possibly reduce their maximum loss.
- Set a Custom Stop Loss: Users can manually adjust their Stop Loss to a level above the predefined Stop price, which can lower their maximum potential loss.
- Flexible Exit Options: Users can also manually exit the contract anytime before the expiration. This gives control over their positions and ensures they can adapt to changing market conditions.
Learn more about Stop Loss Orders in this Help Center article.
Choosing the Right Range
When deciding on which contract range, tick size, and Stop Loss limit to trade on UpDown Options, consider the following factors:
- Risk Appetite: For those comfortable with higher upfront costs and looking for larger potential profits, a wider range contract might be ideal. For those who prefer smaller, incremental gains with lower costs, the narrower range might be more suitable.
- Market Volatility: During periods of high volatility, a wider range can provide more buffer to reduce the probability of getting knocked out quickly.
By understanding the differences between contract ranges and leveraging tools like Stop Loss/Take Profit settings, users can optimize their trading strategy and make the most of the opportunities offered by UpDown Options.
Trade UpDown Options in the Crypto.com App
With Crypto.com | Derivatives North America offering the first derivative product with the Crypto.com App, U.S. users have the ability to buy or sell UpDown Options for BTC and ETH, depending on which way they think the market will move. Users can purchase an option to open a long position if they believe that a digital asset’s price will rise, or sell an option to open a short position if they believe that a digital asset’s price will fall.
Each week, users can choose from four UpDown Options with different barrier prices listed for BTC and ETH, with a total of 10 open positions for each digital asset at any one time. This includes both long and short positions. If the Target or Stop price is hit at any time during the week, the contract is automatically closed and a new one will be created at a different level, providing users with continuous trading opportunities.
Step into the world of derivatives trading with UpDown Options. Participate in the price movement of BTC and ETH at a fraction of the asset’s cost, with built-in protection for every trade.
Conclusion
UpDown Options are a type of option that automatically terminates if the underlying asset price touches a predetermined Target or Stop price. Their benefits include potentially limiting losses, a full exposure to asset price movements at a fraction of the asset’s cost, and enabling hedging for specific needs. Setting a wider contract range requires a large upfront sum, but it has a higher chance of keeping traders in the money.
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, cybersecurity, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets. Returns on the buying and selling of crypto assets may be subject to tax, including capital gains tax, in your jurisdiction. Any descriptions of Crypto.com products or features are merely for illustrative purposes and do not constitute an endorsement, invitation, or solicitation.
The availability of the products described herein is subject to jurisdictional limits, and only available to U.S. users of the Crypto.com App. Foris DAX Inc. and Foris Inc. (d/b/a Crypto.com) offer connectivity to Crypto.com | Derivatives North America, which is regulated by the Commodity Futures Trading Commission, for the purpose of trading derivatives on and subject to the rules of Crypto.com | Derivatives North America.
Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.
