An introduction to option strike price in crypto options
Before entering the crypto options trading market, the option strike price is one of the most fundamental concepts you need to be aware of. Crypto options are derivative contracts. It enables traders and investors to purchase or release crypto assets at a fixed price in future (which is also known as the expiration date). The price at which the crypto assets are bought and sold is known as the option strike price.
At this specific price as an investor or trader, you will be able to exercise your call or put option and buy or sell those underlying crypto assets. Selecting option strike price is extremely fundamental for a crypto option investor or trader because it can directly determine the consequence of your investment.
Three different types of option strike prices
Option strike prices have three different categories which are dependent on the fall, rise and maintain equality with the current market prices. Nonetheless, the spot prices keep on changing in the market and that is why the type of option strike price can also transform according to the specific situation.
Let us have a look at the three different types of option strike prices:
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In the money strike prices or ITM
If a buyer can exercise their right on an underlying crypto asset (depending on call or put option) and purchase it for more or less than the current market price or spot price then the option strike price, in this case, will be regarded as ITM or in the money strike price.
In the case of a call option, the strike price needs to be lesser than the spot for it to become an ITM option. With this, the buyer can purchase the crypto option for less than its current market price. For a put option, the option strike price needs to be greater than the spot price so that the seller can release the crypto assets for more than their current market price.
Process of calculation with an example: Suppose BTC is trading at $35 and an investor has held a call option with $28 as the strike price. The investor can buy the asset at $28 and sell the crypto at $35. If the investor sells 100 units of BTC at $35 which equates to $350 he will receive 700 dollars in profit.
If the premium he will have to pay is $0.50 per unit then an additional $50 dollar will be added to the total price and the total profit will be $650.
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At the money strike price or ATM
If the strike price and spot price of any crypto option become equal then it will be considered as at the money strike price. Sometimes ‘near the money’ is also used when an option becomes as close as 50 cents in order to transform into an ATM.
Calculation process with an example: If a crypto option is being traded at $60 and as an investor, you have put a call option strike price of $60.50 then the call will become near the money. Both ATM and near the money is a good option to opt for when you can expect big movement in the market.
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Out of the money strike prices or OTM
If the strike price of any crypto option does not have any specific intrinsic value, to be more precise if the strike price is more than the market value for a call option or lesser than the spot price for a put option then it will become an OTM option. If you can handle high risk then you can choose the OTM strike option.
Calculation process with an example: Suppose an investor has selected a call option and the strike price he has selected is $30. The crypto option cost $0.50 and the total cost of purchasing the option is $50. The current spot price of the stock is $28.50.
If the investor pays $0.50 per unit thinking that the crypto option will reach above $30 before the expiry then they can benefit from the same if the premium of the option increases by $0.75 or $1.
As mentioned earlier, the option strike price is one of the most fundamental concepts of any crypto option and helps determine the value of any crypto derivative contract. To know more about crypto options and option strike prices you can visit Delta Exchange today!
