What is a Call Option:
A call option is a contract that gives the holder the right, but not the obligation, to buy one Bitcoin at a specified Strike price at a specified Expiration. The buyer pays a premium to a seller for this right.
- Investors may purchase a call option because they believe the price of Bitcoin will increase and want to benefit from an increase in the price of Bitcoin above the Strike price.
- Investors may sell a call option to collect premium or because they believe Bitcoin will decline in value or not appreciate above the Strike price.
Example: Let’s say you think the price of Bitcoin is going up. In this example, you would buy to open a call position. Buying a call option gives you the right to purchase Bitcoin from the option seller for the agreed-upon strike price.
In our example you buy one call option, at a strike price of $10,000 with a premium of $1,000 (cost to purchase the call option) that expires in six months. In order to purchase this contract, you will need to fund your LedgerX account with $1,000. Upon executing the trade, the $1,000 will be transferred from your account to the seller’s account and you will now hold one open call position.
If we fast forward six months to expiration of the contract, we see that Bitcoin is trading at $12,000. You will be able to exercise your call option by funding your account with $10,000 (the strike price). You have now essentially purchased one Bitcoin at $10,000 when the market price for Bitcoin is $12,000, giving you a profit of $1,000 if you were to sell the one Bitcoin you received factoring in the premium you paid for the option.
If at expiration of the contract Bitcoin is trading at $9,000, your call option will expire worthless and you will have lost the $1,000 in option premium you paid six months earlier.