What is a Call Option:
A call option is a contract that gives the holder the right, but not the obligation, to buy bitcoin at a specified strike price at a specified expiration. The buyer pays a premium to the 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: You think the price of Bitcoin is going up. You could buy a call option.
Buying a call option gives you the right to purchase bitcoin from the option seller for the strike price.
You buy one call option at a strike price of $10,000 with a premium of $1,000 that expires in six months. The premium is the cost to purchase the call option.
To buy the option, you need to fund your 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.
Fast forward six months to expiration of the contract and the current market price of bitcoin is $12,000. Six months ago, you paid for the right to buy bitcoin at $10,000. To exercise your option, you will need to fund your account with $10,000 (the strike price).
You have now purchased one bitcoin at $10,000 when the market price for Bitcoin is $12,000, giving you a profit of $1,000 ($2,000 gain if you were to sell the one bitcoin you buy at market price less the $1,000 premium you paid for the option).
Fast forward six months to expiration of the contract and the current market price of bitcoin is $9,000. Your call option will expire worthless and you will have lost the $1,000 in option premium you paid six months earlier.