Academy Trading Ideas Article

Buy Put Options

2020.05.15

Firstly, let me introduce the three elements of OKEx options:

Exercise price: the buyer and seller agree to buy and sell the BTC/USD index at the agreed price on expiration date.

Options naming rule: Named in order of “underlying asset – expiration date – exercise price – contract type”. For instance, “BTCUSD-200327-7000-P” represents the underlying is BTC/USD index, expiration date is March 27, 2020, and the option is a put option with the exercise price of $ 7,000.

Options premium: The fund is spent on buying options contract, which is also the fund received by the seller when selling options contract. Please note that OKEx options premium equals to the quote for 10 contracts.

Assuming that current Bitcoin price is $ 7,000. Trader A expects that the price of Bitcoin will decrease in the future, so he thinks it’s the right time to buy put options. Suppose that the trader A buys 10 put options (equals to 1 bitcoin) with an exercise price of $7,000 by 0.05 BTC, then the profit and loss on expiration date will be as the figure below:

Break-even point of the underlying price (Bitcoin) on expiration date:  exercise price / (1+options premium) = $ 7,000 / (1+0.05) = $ 6666.67, i.e. if the Bitcoin price on expiration date is $ 6666.67, the buyer of the put option will break even.

Max loss: 0.05 BTC, that is to give up exercising the contract and lose the options premium.

Profit: max [(exercise price – underlying price) / underlying price, 0]-options premium

If the underlying price falls to $5,000, then Profit = max [(7,000-5,000) / 5,000,0] -0.05 = 0.35BTC

You may wonder what is the advantage of buying a put option with the exercise price of $7,000 compared with spot and futures trading? Assuming that the underlying price (Bitcoin) is $ 7,000, and we expect the bitcoin price to go down:

The cost of buying a put option with the exercise price of $7,000: 0.05 BTC,

The cost of selling in spot market: $ 7,000

The cost of selling a futures contract: depending on the leverage, between $70-$7,000

To put it simply, the advantage of buying put options is that the cost is relatively low, and it’s no need to worry about liquidation, and the loss is limited. Compared with the spot and futures contracts, the total profit is only a little bit less, but the profit is higher after taking leverage into account.

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