We’re super excited to talk about options strategies, including how to use single options and combinations of options to maximize returns and minimize risk. There are many options strategies available. This series of articles condenses options trading down to its largest themes — bullish, bearish, and neutral trading strategies.
- Bearish Options Strategies
- Bullish Options Strategies
- Price-independent Options Strategies
Overall, the dramatic price movement in the last few months makes us keen to kick off with bearish options strategies. If you’re looking to protect the positions you’re HODLing, or if you’re looking to ape and win big when the mass liquidations hit — this is the post for you.
We will review a variety of bearish options strategies, including married puts, protective collars, put debit spreads, and puts. Then in future articles, we will break down bullish options strategies and price-independence options strategies.
A married put is the easiest and most effective strategy to implement as a HODLer. It combines the coins that you’ve stashed away with buying an out-of-the-money put.
An investor implementing this strategy will pay a premium for puts but will have their downside limited. Think of this like buying insurance for your portfolio — you will get all the upside when your coins MOON and limit the downside when crypto crashes.
Protective collars have the same components as married puts. Except the investor will also sell an out-of-the-money call to collect premiums and fund their purchase of the put.
This strategy is for investors who think their coins will rise moderately over the life of the option — While also wanting to protect themselves against a potential drop. This is an excellent strategy for investors who don’t wish to pay the expensive premiums found in crypto-land and instead want to enjoy bull-runs without the cost of buying the put.
Put Debit Spread
A put debit spread is buying a put in a higher strike and selling a put in a lower strike. This strategy is a direct way for traders to bet that the price of a coin is going down.
When the trader sells a lower strike put, they will collect back some of the expensive premium costs that usually come with long expiry or more volatile digital assets. Making the put debit spread a much cheaper strategy compared to a regular put.
This strategy has a max profit that equals the difference between the two strikes, meaning the $SOL 35–30 Put Debit Spread will win a maximum of $5, minus any premiums paid for the strategy.
The put itself is the simplest but often the best trade for those who want to bet on a massive price drop. This is because the maximum amount of money a trader can make from a put is as much as the coin price.
The timing and strike matter most when selecting a put to buy. Timing and strike will determine the majority of your cash outlay. Traders must consider if their bet is a short-term play and where they think the price will drop. For example:
DefiTrader thinks that the price of BTC is going to $25k in a week — and the current price of BTC is $40k. Which put should they buy?
- The BTC $40k put expiring June 25th costs $7k. It will be worth $15k if BTC goes to $25k.
- The BTC $32k put expiring June 25th costs $3k. It will be worth $7k if BTC goes to $25k.
You can look at this in terms of the probabilities that these puts imply. The $40k put costs $7k and will make an $8k profit if BTC falls to the price the DefiTrader predicted. Meaning BTC only needs to fall 47% of the time for these puts to be profitable (solving for P where P × 8000 — (1–P)* 7000 = 0). The $32k put, however, is probably a better bet for DeFiTrader — it only requires a 43% chance for BTC to fall to $25k for these puts to break even.
When choosing strikes, you can transform the price of any option into a probability. Then use that to determine which option gives you the best risk-reward for your strategy. This isn’t the only tool you should rely on, but it’s a great way to think about the payoff associated with betting on the price of an underlying asset.
We’re excited to announce that we are now offering quizzes with each Zeta 101 post! Details will be announced on our Twitter and Discord so make sure to keep an eye out!