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In the last chapter, we went through fundamental terms of options as well as some basic strategies. We are glad to see you here in this article because options trading has clearly drawn your interest! Now in this section, you will learn more details about option pricing, the Greeks, and Option Chain on SignalPlus Toolkit.
In the world of cryptocurrency, another popular derivative is Perpetual Futures. A futures contract is a binding agreement to trade a specific asset, such as bitcoin or ether, at a certain price and at a predetermined time in the future. Perpetual futures, as its name indicates, do not have an expiration date and the exchanges use special mechanisms (as we will discuss later, funding rate), to close the price difference between futures and spot prices. Perpetual contracts are popular because they are timeless and traders get the chance to perform either long or short trades without the constraint of the market condition. In addition, they can be highly levered - some exchanges allow users to borrow money and trade up to 100x leverage.
Options, in the meantime, provide some additional benefits that perpetual futures fail to offer. The high leverage of perpetual futures can be a double-edged sword - if the market goes against your initial expectation, even at a very small scale, the position can be liquidated forcefully and you can lose your entire fund. Even if the market eventually moves to align with your initial plan, you can no longer benefit because you have been knocked out.
On the other hand, if you own an option, which still can be highly levered as well, after paying the initial premium, you will never get knocked out as long as the contract is not expired. You still keep your chance of coming back, as long as the asset moves in your favor before expiration! Note that if you sell an option, you still have liquidation risk, but options do provide more flexibility for your investment needs.
Furthermore, if utilizing options tactically, you can isolate risk factors and make a profit in almost every imaginable scenario. You can benefit from the market's ups and downs, from the market going sideways, from volatility fluctuation, and from the passage of time, whereas you can only bet on market direction using futures. In summary, options are a more powerful and efficient tool for sophisticated traders. And we will show you how you can achieve these goals in the sections below.
In the previous article, we briefly mentioned the value of an option
Option Price = Intrinsic Value + Time Value
And in this section, we would like to go in-depth on how the market really prices the option of an asset and what affects the option price.
SignalPlus helps users to visualize Intrinsic Value and Time Value over time
Intrinsic Value is fairly easy to explain - it is how far the option is in-the-money. For ATM or OTM options, the intrinsic value is simply zero.
Time Value is a little more difficult to understand than intrinsic value. It can be considered as the value of possible movement of the underlying asset price from now till expiration. And the exposure or the risk can be mostly broken down into factors below - any movements in each of the factors can impact the time value of the option, therefore changing the price of the option**.**
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