1. Scenarios:
- When investors expect the price of the underlying asset to drop significantly, they can choose to buy put options and use a small amount of capital to gain leverage from the price drop of the underlying asset.
- Buying put options in a bear market to obtain high returns at a lower cost and control potential losses.
Buying put options is also one of the common option strategies used by many investors.
2. Description:
Buying put options means that you need to pay a premium to buy a contract that gives you the right to sell a certain asset (the underlying asset) at a pre-agreed price (the strike price) at a certain time (the expiration date).
For example, at Coincall, you spend $1,000 to buy a put option for 1 BTC, with a strike price of $22,000 and an expiration date of June 30, 2023, i.e., BTC-30JUN23-22000-P. This means that you have the right to sell 1 BTC at a price of $22,000 on June 30, 2023.
3. Examples:
Suppose the current BTC price is $25,000, and we expect the price to drop rapidly, so we buy a near-month BTC put option with a strike price of $22,000 for a price of $1,000.
At the expiration date, if the price of BTC drops to $20,000, the option will make a profit of $1,000, calculated as follows:
22,000 (strike price) – 20,000 (expiration price) – 1,000 (premium) = 1,000
If the BTC price rises to $23,000, the put option will become worthless and will not be exercised. Your maximum loss is the entire premium, which is $1,000. This is what we often refer to as buying an option with “limited risk, unlimited reward”.
Profit and loss table:
| Expiration Price | Strike Price | Premium | Profit/Loss | Option Type |
| 20,000 | 22,000 | 1,000 | 1,000 | In-the-money |
| 21,000 | 22,000 | 1,000 | 0 | In-the-money |
| 22,000 | 22,000 | 1,000 | -1,000 | At-the-money |
| 23,000 | 22,000 | 1,000 | -1,000 | Out-of-the-money |
The profit and loss charts shown above are for the expiration date of the options. In trading, most investors choose to close their positions early. At this point, calculating the profit and loss for buying put options is simpler: buyer’s profit and loss = closing premium – opening premium, which is the income from the difference in option premiums earned through buying and selling.
4. Advantages:
- As the underlying asset price drops, the price of put options rises
The price of put options moves in the opposite direction of the underlying asset, so buying put options can make money when the underlying asset is expected to drop significantly.
- Leverage for larger profits
Leverage is one of the main reasons why options are attractive to investors. Generally, the leverage of options is higher than that of futures, and investors can use the high leverage of options to achieve multiple returns. Buying put options can be used to profit from an expected drop in the underlying asset.
- Limited losses
The biggest loss from buying put options is the premium cost (while futures may lead to margin calls). Theoretically, the maximum profit occurs when the underlying asset price approaches zero.
5. Notes:
1. Start with a small position
For new investors, it is recommended to buy a small number of options to try, so that even if the first option investment fails, it can be accepted and adjusted.
2. Contract selection
Most investors will choose contracts with high liquidity. Currently, Coincall provides two types of options contracts, BTC and ETH, and offers to price in USD stablecoins, providing the best options trading experience for new investors.
3. Leverage selection
Generally, the more out-of-the-money the options, the higher the leverage, and the closer to expiration, the higher the leverage. Investors can choose the appropriate exercise price and expiration date based on their risk preference and expected leverage.
4. Risk management
Buying put options faces the risk of losing all the premium when the option contract is out-of-the-money at expiration. For new investors, setting stop-loss points can be used to avoid a loss of value, such as closing the position when the option price falls by 20%.
5. Liquidity risk
For options traders, they can choose market price or limit price to close positions, but there may be slippage due to insufficient market liquidity, which will affect the income of options transactions.
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