When to Use a Call Option Strategy

Definition of Long Call

A Long Call strategy involves purchasing a call option by paying a premium, which gives the buyer the right (but not the obligation) to buy the underlying asset (e.g., BTC) at the strike price on the expiration date.

Key Features:

• Maximum Loss: Limited to the premium paid (if the option expires unexercised).
• Maximum Profit: Theoretically unlimited (the higher the underlying asset’s price, the higher the return).
• Best Suited for: Strong bullish outlook; anticipating a significant price increase in the underlying asset, potentially with rising implied volatility (IV).
• Breakeven Point: Strike Price + Premium (the asset must rise above this point to generate profit).

Definition of Short Call

A Short Call involves selling a call option and receiving a premium, while taking on the obligation to sell the underlying asset at the strike price (if the buyer exercises the option).

Key Features:

• Maximum Profit: Limited to the premium received (if the option expires unexercised).
• Maximum Loss: Theoretically unlimited (if the asset’s price surges, the seller must buy high to sell at the lower strike price).
• Best Suited for: Neutral to bearish markets where prices are expected to remain flat or fall, and implied volatility is expected to drop.
• Risk Alert: Requires margin and exposure to unlimited loss if the market moves sharply upward.

When to Use a Put Option Strategy

Long Put: The chart below illustrates the profit curve of a Long Put (naked put purchase), showing how the strategy profits as BTC price declines. The potential gain increases as the price falls, while the maximum loss is limited to the premium paid.

A Long Put involves buying a put option by paying a premium, giving the buyer the right (not obligation) to sell the underlying asset (e.g. BTC) at the strike price on the expiration date.

Key Features:

• Maximum Loss: Limited to the premium paid (if the option expires unexercised).
• Maximum Profit: Theoretically limited to Strike Price – Premium (if the asset price falls to zero).
• Best Suited for: Strong bearish market outlook; expecting a sharp price drop in the underlying asset, with potential IV increase.
• Breakeven Point: Strike Price – Premium (the asset must drop below this point to yield profit).

Definition of Short Put

A Short Put strategy involves selling a put option, earning the premium while taking on the obligation to buy the underlying asset at the strike price (if the option is exercised by the buyer).

Key Features:

• Maximum Profit: Limited to the premium received (if the option expires unexercised).
• Maximum Profit: Theoretically limited to Strike Price – Premium (if the asset price falls to zero).
• Best Suited for: Neutral to bearish markets where prices are expected to remain flat or rise slightly, and implied volatility is expected to drop.
• Risk Alert: Requires margin and carries risk if the market drops significantly.

Options Profit/Loss (PNL) Calculations

Whether trading American or European options, traders can close their positions before expiration via market trades. This action is unrelated to whether the option itself allows early exercise. For example, although Gate offers European-style options (which can only be exercised at expiration), users can still close positions anytime by trading in the market.

Closing a Position Early – PNL Calculation:

• For Long Positions: PNL = Selling Price – Buying Price
• For Short Positions: PNL = Buying Price – Selling Price

PNL Calculation for Options Held Until Expiration

When an option is held until its expiration date, its final value is determined by the difference between the underlying asset price and the strike price of the option. For call options:

Formula:
PNL = (Price at Expiration – Strike Price – Premium) × Contract Multiplier × Contract Quantity

Example Analysis:

Example 1 (Profitable):

• Bought a BTC call option with Strike Price of 30 USDT, premium of 1.26 USDT
• Price at Expiration = 38 USDT
• Multiplier = 100, Quantity = 1

Calculation: (38 – 30 – 1.26) × 100 × 1 = 674 USDT Profit

Example 2 (Loss):

• Same option
• Price at Expiration = 31 USDT

Calculation: (31 – 30 – 1.26) × 100 × 1 = -26 USDT Loss

(Even though the option has 1 USDT intrinsic value, it’s not enough to cover the 1.26 USDT premium)

Key Takeaways

1.Risk Profile:

• Maximum Loss: Limited to the premium paid (when the market price of the underlying asset is less than or equal to the strike price)
• Potential Profit: Theoretically unlimited (profits increase with the rise in the price of the underlying asset).

2.Closing Positions Early:

• Profit/loss is determined by the difference between entry and exit prices.
• Works the same regardless of whether the option is American or European.

3.Settlement at Maturity:

• Options have intrinsic value only when the asset price exceeds the strike price.
• To realize a net profit, the final gain must exceed the cost of the premium paid.

4.Breakeven Point:

• Strike Price + Premium
• Asset prices must move beyond this point to yield a profit.

Note: In real trading scenarios, it’s important to account for factors such as trading fees, market liquidity, and potential slippage, as these can affect your actual returns.