Crypto Options: 10 Best Crypto Trading Strategies 2024

What are crypto options?

Crypto options are a form of derivative contract (financial contracts that derive their value from an underlying asset, group of assets or benchmark), which give traders the right to buy a specific cryptocurrency at a predetermined price and date /sell.

There are two typical types of crypto options – call options and put options. In short, a call option allows investors to buy an asset at a specific price on a predetermined date, while a put option gives the right to sell that asset at a specific price and date.

These financial instruments offer many strategies that can be adapted to different market conditions and individual trading goals. This article delves into the top 10 strategies for trading crypto options, providing detailed insights into their mechanics, benefits and potential risks.

10 Crypto Strategies for Crypto Options

Long call

A long call gives the buyer the right to buy a cryptocurrency at a specified price (called the strike price) before the option’s expiration date. This strategy is mainly used when a trader expects the price of the underlying asset to rise significantly.

When you buy a call option, you pay a premium to the seller for the right to buy the cryptocurrency at the strike price. If the price of the cryptocurrency rises above the strike price, you can exercise the option to buy at the lower price, possibly selling at the current market price for a profit.

Advantages and disadvantages of long calls are:

Advantages

Unlimited profit potential: The potential profit is unlimited as the price can rise indefinitely.

Limited risk: The maximum loss is limited to the premium paid for the option.

Risks

Time Lapse: The value of the option decreases as the expiration date approaches, which can erode profits if the underlying asset does not move as expected.
Volatility risk: Sudden drops in volatility can negatively affect the value of the call option.

Long put

A long put allows the holder to sell a cryptocurrency at a predetermined strike price before the option expires. This strategy is used when a trader expects a drop in the price of the underlying asset.

Similar to long calls, traders pay a premium for their long put. If the price of the cryptocurrency falls below the strike price, you can exercise the option to sell at the higher strike price and thus profit from the drop.

Advantages and disadvantages of long set are:

Advantages

Profit from declines: Allows traders to profit from a drop in the price of the underlying asset.

Limited risk: The maximum loss is limited to the premium paid for the option.

Risks

Time Lapse: Like a long call, the put option’s value decreases as it approaches expiration.
Volatility risk: If the volatility of the cryptocurrency decreases, the value of the put option may decrease.

Covered call

A covered call strategy is when an investor chooses to hold a long position in a cryptocurrency while simultaneously selling a call option on the same asset. This strategy is used to generate additional income from the premiums received from the sale of the call option.

In fact, you own the underlying cryptocurrency and sell a call option against it. If the price of the cryptocurrency rises above the strike price, you must sell your holdings at the strike price. As a result, your profit is limited, but you can generate income from the premium.

Advantages and disadvantages of a covered call are:

Advantages

Income generation: Provides additional income through the premiums received.
Disadvantage Protection: The premium received provides some downside protection.

Risks

Limited upside: If the price of the underlying asset rises significantly, the profits are limited to the strike price of the sold call option.
Full downside exposure: The strategy does not protect against significant declines in the price of the underlying asset.

Protective Well

As the name suggests, a protective put strategy means holding a long position in a cryptocurrency and buying a put option on that underlying asset. This strategy acts as an insurance policy to protect traders from significant losses.

You buy a put option while holding the underlying asset. If the price of the cryptocurrency falls, the put option increases in value, offsetting the losses from the decline in the underlying asset’s price.

Advantages and disadvantages of a protective well are:

Advantages

Disadvantage Protection: Protects against significant declines in the price of the underlying asset.
Unlimited upside: Allows the trader to profit from any price increase in the underlying asset.

Risks

Cost of protection: The premium paid for the put option can be expensive, especially in volatile markets.

Straddle

This strategy allows traders to buy both a call and a put option with the same strike price and expiration date. When a trader expects a significant price move but is unsure of the direction, they may opt for a straddle. Consequently, if the price moves significantly in either direction, one of the options will become profitable.

Advantages

Profit from Volatility: The strategy takes advantage of significant price movements regardless of direction.
Unlimited profit potential: Both the call and put options can generate significant returns if the price moves significantly.

Risks

How cost: Buying both options can be expensive, and the trader needs a significant price move to cover the cost of the premiums.
Time Lapse: Both options lose value as the expiration date approaches.

Strangle

This strategy is a derivative of the straddle strategy. A strangle involves buying a call and a put option with different strike prices but the same expiration date. This strategy is typically cheaper than a straddle because of the different strike prices.

With strangle, you buy a call option with a higher strike price and a put option with a lower strike price. When the price of the cryptocurrency moves significantly in either direction, one of the options will become profitable.

Pros and cons of a choke are:

Advantages

Profit from Volatility: Profits from significant price movements, regardless of direction.
Lower cost: Cheaper than a border because of the different hit prices.

Risks

Moderate price movement required: Requires a significant price movement to be profitable, but the range of movement required is wider than a straddle.
Time Lapse: Both options lose value as the expiration date approaches.

Iron Condor

OK, this is going to be a little more complex. Adopting an iron condor strategy means selling a lower-strike put, buying a higher-strike put, selling a lower-strike call and buying a higher-strike call , all with the same expiration date. In iron condor, you create a range in which you expect the price to stay. By selling options within this range and buying options outside this range, you collect premiums from the sold options while limiting your risk with the purchased options. This strategy is employed when a trader expects low volatility and a range-bound market.

Advantages

Income generation: Generate income through the premiums received from the sale of the call and put options.
Limited risk: The maximum loss is limited to the difference between the strike prices of the bought and sold options, minus the net premium received.

Risks

Limited profit potential: The profit potential is limited to the net premium received.
Losses as volatility increases: The strategy results in losses if the price of the underlying asset moves significantly outside the range of the strike prices.

Butterfly Smear

When you buy a call (or put) at a lower strike price, sell two calls (or puts) at a mid-range price, and buy a call (or put) at a higher strike price, you are using the butterfly spread. This strategy is used when a trader expects low volatility and a range-bound market. Essentially, you create a spread with three different strike prices. The middle strike price is where you expect the price to stay, taking advantage if the price stays close to this level at expiration.

Advantages

Limited risk: The maximum loss is limited to the initial cost of the spread.
Potential for high reward: If the price of the underlying asset stays close to the middle strike price, the strategy can generate significant returns.

Risks

Limited profit potential: The profit potential is limited to the difference between the strike prices, minus the net premium paid.
Losses as volatility increases: The strategy results in losses if the price of the underlying asset moves significantly outside the range of the strike prices.

Calendar distribution

When a trader expects low volatility in the short term, but expects greater volatility in the long term, they can use the calendar spread strategy. A calendar spread involves buying and selling two options of the same type (either calls or puts) with the same strike price but different expiration dates. You buy a longer term option and sell a shorter term option at the same strike price. The strategy benefits from the time expiration of the shorter-term option.

Advantages

Income generation: Generate income through the premiums received from the sale of the shorter-term option.
Take advantage of Time Decay: Profit from the faster time decay of the shorter term option.

Risks

Limited profit potential: The profit potential is limited to the difference in premiums between the two options.
Losses as volatility increases: The strategy results in losses if the price of the underlying asset moves significantly in the short term.

Diagonal distribution

If you are looking for a method that combines elements of both calendar distribution and vertical distribution, the diagonal distribution is the right fit. A diagonal spread requires investors to buy and sell two options of the same type (either calls or puts) with different strike prices and different expiration dates. You create a spread with different strike prices and expiration dates, and by adjusting the strike prices and expiration dates, you can adjust the strategy to your market outlook.

Advantages

Income generation: Generate income through the premiums received from the sale of the shorter term option.
Flexibility: Provides flexibility in adjusting the strike prices and expiration dates to suit market conditions.

Risks

Moderate price movement required: Requires a moderate price movement to be profitable.
Complexity: More complex to manage than other strategies due to the different strike prices and expiration dates.