Crypto options are a type of derivatives that are used to buy or sell underlying assets at a predetermined date and price. These are issued by issuers and bought by traders. Traders can choose not to exercise them. Options are used to hedge risks and speculate in the market. Currently, many derivatives are used in the crypto market. Together they have increased liquidity in the market. In addition, they have also improved market equilibrium conditions by providing instruments to exercise arbitrage opportunities. Crypto options are also one such form of derivatives that made it possible! Let’s dive in and understand how they work and their benefits. What are crypto options? Options are a form of derivatives. Derivatives are financial instruments used to hedge or speculate on an asset. Crypto options are a form of options. However, the core function remains the same. They give the buyer of an option the right to buy or sell an asset at a predetermined time and price. There are two types of options available in the market: a call option and a put option. A call option is used to buy and a put option is used to sell assets when you choose to exercise them. The essential difference between futures and options is that you are not required to exercise options. Futures, on the other hand, don’t give you that freedom. How do crypto options work? The process of crypto options is essentially simple. There is an issuer that issues a put and a call option at a certain price with a strike price and expiration date. The strike price is the value at which the underlying asset can be brought or sold at the time the option is exercised. Now let’s look at a real-life example. Let’s say a trader buys a put option from an issuer at a strike price of $100 at a cost of $5. The current value of the underlying asset on which the option is issued is $95. Therefore, it would make no sense to to exercise now. If you choose to exercise it now, you will not make a profit. You sell the asset for $100 and the option costs $5. That’s why you get a total of $95. That’s why you shouldn’t exercise it. However, once the asset’s price goes to $85 and earns $10 after exercising the put option. Similarly, you can exercise the call option if the price of an asset rises above the strike price + price of the call. So you earn the difference between the price of the asset – strike price – the price of the call option. Advantages of crypto options In addition to improving the market balance by providing arbitrage opportunities, they also allow users to hedge against risk. They are cost effective because you do not have to pay a premium upfront when issuing an option contract. Another hidden advantage is that you cannot exercise the option contract under duress. You have the option of not exercising the contract.