Basic Options Strategies

Here's a guide to the basic options strategies you can trade on LedgerX!

We currently offer Bitcoin (BTC) and Ethereum (ETH) options.

BTC Contact Size = 0.01 BTC. 100 Mini Contracts = 1 BTC

ETH Contact Size = 0.10 ETH. 10 Deci Contracts = 1 ETH

Check out our LedgerX Education Channel to learn more about which option strategy works for you!

Buying a Call

Fundamentals

What? When you buy a call option you pay a premium for the right to buy the underlying (BTC or ETH) at the strike price on the expiration date. 

Why? You think the underlying price is going up. If the market price is above the strike price at expiration, you can use your right to buy at the strike price which is lower than the market price.

How? You need dollars to pay the option premium, or the fee for the option. At expiration, the long holder (the buyer) needs dollars to exercise if the option is in-the-money (# of contracts*strike price). Long holders that exercise receive BTC/ETH at the strike price.

Expiration, Exercising & Closing

When you buy a call option, you have two options at expiration: exercise or sell your call option. The expiration date is the last day that the option contract can be traded or exercised.

  • In-the-money: The underlying price is above the strike price
  • At-the-money: The underlying price is at the strike price
  • Out-of-the-money: The underlying price is below the strike price

Exercising in-the-money call options

You need U.S. dollars to exercise long call options. When exercising, you are using your right to buy the underlying (BTC or ETH) at the strike price. Check the Exercise tab to see how much dollars you need to exercise your long options.

The exercise window opens 48 hours before settlement on the expiration date. The exercise window closes at options settlement at 5pm ET on the expiration date. You can submit exercise instructions on the platform under Balances & History > Exercise Instructions

LedgerX does not automatically exercise options, meaning you must submit instructions to exercise. If you do not submit instructions, your options will expire worthless even if they are in-the-money (ITM). 

Sell to close call option

You can sell to close your long call position anytime before the expiration date. The option buyer can sell to close their long position to realize their profit or loss.

Rather than exercising your position, you can close a long position by selling the number of contracts that you are long. If the market price of the underlying asset is above the current strike price before expiration, selling to close would allow you to resell your option back to receive a premium.

You do not need to post collateral for a short position when selling to close.

Let your option expire worthless

The option buyer can choose to not do anything and let the option expire worthless. If the long holder does not exercise or trade out then the option expires worthless, even if the options are in-the-money. LedgerX does not automatically exercise options. 

 
Example on how to buy a call on LedgerX

When you buy options you pay a premium for the right to buy the underlying at the strike price on the expiration date.  

Example with BTC

For example, assume a three-month bitcoin mini call option for the $50,000 strike is trading at a premium of $1,000, or $10 per contract. You will need $1,000 in your account to buy 100 bitcoin mini call options. This premium is immediately transferred to the seller when you buy the options. 

In-the-money

Your call option will be in the money if the underlying market price rises above the strike price. This means you can exercise your right to buy BTC at a lower price than it is currently trading on the market. For example, assume bitcoin is trading above $50,000 at a market price of $60,000. Your potential profit is the difference between the underlying market price and the strike price, less the premium paid ($60,000 market price - $50,000 strike price - $1,000 premium = $9,000 potential profit, or $90 per mini contract). 

If you sell to close your option, your potential profit is the difference between the sale price and the $1,000 premium you initially paid to enter the long call position.

Out-of-the-money

If bitcoin price stays at or falls below $50,000, the $50,000 call should expire worthless since it is trading below the strike price. You would lose the $1,000 premium that you paid at the time you purchased the option.

How to buy a call option on LedgerX

  1. Click the Ask Price on the Options Chain
  2. Enter # of Contracts & Price
  3. Click Buy to confirm your order
  4. Review 
  5. Confirm Buy Order

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Contracts: the number of contracts you want to buy. Minimum quantity = 1. 

1 long call option mini contract gives you the right to buy 0.01 BTC /0.1 ETH at the strike price on the expiration date.

Price: the price you pay for the call option. Options prices are quoted in terms of 1 bitcoin/1 ether.

Underlying: the amount of BTC/ETH you have the right to buy at expiration

Premium: the total dollar amount you pay the seller at time of trade

Break Even = strike price + premium paid 

Max Cost = premium paid 

Selling a Covered Call

Fundamentals

What? You receive a premium for agreeing to sell the underlying at the strike price. 

Why? You can take short-term profit if you're also willing to sell at the strike price on the expiration date. 

How? You post the underlying as collateral, this gets position locked in order for the long holder to purchase at the time of expiration. 

Covered Call = Long BTC or ETH + Short call option

Traders commonly use covered calls to generate yield or income on their BTC/ETH holdings. The trader collects a premium for selling the call option while maintaining their long bitcoin/ether position (with the risk of selling their bitcoin/ether position if bitcoin/ether price rises above the strike price).

You are selling someone else the right to buy bitcoin or ether that you own (hence “covered”) at the strike price on the expiration date. You receive a premium in USD when you sell the covered call. LedgerX does not allow uncovered or naked short options positions.

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Expiration, Assignment & Closing

When you sell a call option, there are a few possibilities at expiration: buy to close your position, assignment, or the position expires worthless.

  • In-the-money: The underlying price is above the strike price
  • At-the-money: The underlying price is at the strike price
  • Out-of-the-money: The underlying price is below the strike price

Buy to close call option

You can buy to close your short call position anytime before the expiration date. Buy to close your short position by buying the number of contracts that you are short. If you do not close your position, you may be assigned at expiration. This means you are required to deliver the underlying at expiration. 

The Position Locked collateral for the short position will be unlocked when you close the position. 

Assignment

You may be assigned on your short call if the call option buyer exercises their option. Only the long holder can exercise options. If you’re assigned, then you must sell your locked BTC or ETH at the strike price. You will likely be assigned on your short call if the price of BTC or ETH is above the strike price at expiration.

Example on how to sell a covered call on LedgerX

How to Sell a Call Option

  1. Select the option you want to trade on the options chain 
  2. Click the Bid Price. The top bid is the current highest price you can receive for selling the option. 
  3. Enter # of Contracts. You can edit the price in this form. 
  4. Click Sell/Short and review the order summary
  5. Click Confirm Sell Order. You will receive USD Premium if your order executes. 

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Contracts: the number of contracts you want to buy. Minimum quantity = 1. 

If the long holder exercises their option on the expiration date, you will be selling 0.01 BTC or 0.1 ETH at the strike price for each contract.

Price: the price you pay for the call option. Options prices are quoted in terms of 1 bitcoin/ether.

Underlying: the amount of BTC/ETH you may be selling at expiration

Premium: the total dollar amount you receive at the time of trade 

Break Even = strike price + premium paid 

Min Credit = premium received 

*BTC/ETH Locked Collateral may be assigned at the strike price on the expiration date

Buying a Protective Put

Fundamentals

What? You buy the option to sell the underlying (BTC or ETH) at a higher price than you think it will be worth.

Why? You think the price in the underlying will decline, but don't want the risk of being outright short or you want to hedge your BTC or ETH position.

How? When you buy an option, you will pay the seller the $ premium at the time of the trade. You need BTC or ETH on account to exercise. Put buyers that exercise, receive cash = to strike price for selling BTC or ETH.

Protective Put = Long bitcoin + Long put option

Traders commonly use protective puts as a form of “insurance” on their bitcoin holdings by limiting downside risk in the short term. Protective puts are typically used to hedge against a potential drop in bitcoin’s price. Traders can remain long bitcoin with the option to sell their bitcoin at the strike price if the price of bitcoin declines. 

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Expiration, Exercising & Closing

When you buy a put option, you have two options at expiration: exercise or sell your put option. The expiration date is the last day that the option contract can be traded or exercised.

  • In-the-money: The underlying price is below the strike price
  • At-the-money: The stock underlying is at the strike price
  • Out-of-the-money: The stock underlying is above the strike price

Exercise in-the-money put options

You need the underlying (BTC or ETH) to exercise long put options. When exercising long puts, you are using your right to sell BTC or ETH at the strike price. Check the Exercise tab to see how much BTC or ETH you need to exercise your long put options.

The exercise window opens 48 hours before settlement on the expiration date. The exercise window closes at options settlement at 5pm ET on the expiration date. You can submit exercise instructions on the platform under Balances & History > Exercise Instructions

LedgerX does not automatically exercise options, meaning you must submit instructions to exercise. If you do not submit instructions, your options will expire worthless even if they are in-the-money (ITM). 

Sell to close put option

You can sell to close your long put position anytime before the expiration date. The option buyer can sell to close their long position to realize their profit or loss.

Rather than exercising your position, you can close a long position by selling the number of contracts that you are long. If the market price of the underlying asset is above the current strike price before expiration, selling to close would allow you to resell your option back to receive a premium.

You do not need to post collateral for a short position when selling to close.

Let your option expire worthless

The option buyer can choose to not do anything and let the option expire worthless. If the long holder does not exercise or trade out then the option expires worthless, even if the options are in-the-money. LedgerX does not automatically exercise options.  

Example on how to buy a put option on LedgerX

When you buy a put option you pay a premium for the right to sell the underlying at the strike price on the expiration date.  

Example with BTC

If you want to fully hedge 1 BTC with puts, you would need to buy 100 put contracts which is equivalent to 1 BTC.
Total cost = [# of BTC] x [$ premium]. 

For example, the Dec 2021 $60k put is trading around $10,000.
Total cost = [1] x [$10,000] for 100 contracts plus trading fees [0.15/contract].

When the trade executes, the seller will receive your $10,000 premium and you will be long 100 contracts. 

In-the-money

It's now Dec 2021 and BTC is trading at $40,000. You can now sell your 1 BTC at $60,000 when the market price for Bitcoin is $40,000, giving you a profit of $10,000 per BTC (factoring in the premium you paid for the option).

Out-of-the-money

It's now Dec 2021 and BTC is trading at $80,000. Your put option will expire worthless and you will have lost the $10,000 in option premium you paid earlier.

How to buy a put option on LedgerX

You are paying for the right to sell BTC or ETH at the strike price on the expiration date.

You need dollars in your account to purchase options. You can send dollars to LedgerX via wire transfer or sell BTC or ETH on the platform for USD

  1. Click the Ask Price
  2. Enter # of Contracts & Price
  3. Click Buy to confirm your order
  4. Review 
  5. Confirm Buy Order

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Contracts: the number of contracts you want to buy. Minimum quantity = 1. 

1 long put option mini contract gives you the right to sell 0.01 BTC or 0.1 ETH at the strike price on the expiration date.

Price: the price you pay for the put option. Options prices are quoted in terms of 1 bitcoin/ether.

Underlying: the amount of BTC/ETH you have the right to sell at expiration

Premium: the total dollar amount you pay the seller at the time of trade 

Break Even = strike price - price

Max Cost= premium paid

Selling a Cash Covered Put

Fundamentals

What? You receive a premium for agreeing to buy the underlying at the strike price. 

Why? You think the underlying (BTC or ETH) will rise in the future. If the underlying rises, the option should expire worthless and you keep the premium you received for selling the put. If the underlying falls below the strike price, you may be obliged to buy the underlying at the strike price. 

How? You need to post USD equal to the strike price for collateral (hence "cash-covered"). 

When you sell a put on LedgerX, you receive a premium immediately and are obligated to buy the underlying at the strike price on the expiration date. You are required to keep the cash collateral locked on LedgerX until expiration or trading out of the position. LedgerX does not allow uncovered or naked short put positions.

Expiration, Assignment & Closing

When you sell a put option, there are a few possibilities at expiration: buy to close your position, assignment, or the position expires worthless.

  • In-the-money: The underlying price is below the strike price
  • At-the-money: The underlying price is at the strike price
  • Out-of-the-money: The underlying price is above the strike price

Buy to close put option

You can buy to close your short put position anytime before the expiration date. You can buy to close your short position by buying the number of contracts that you are short. If you do not close your position, you may be assigned at expiration. This means you are required to buy the underlying at expiration. 

The Position Locked collateral for the short position will be unlocked when you close the position. 

Assignment

You may be assigned on your short put if the put option buyer exercises their option. Only the long holder can exercise options. If you’re assigned, then you must buy BTC or ETH at the strike price. You will likely be assigned on your short put if the price of BTC or ETH is below the strike price at expiration.

Example on how to sell a put on LedgerX

You collect a dollar premium at the time of the trade. You are obligated to buy BTC or ETH at the strike price if you're assigned.

Using Bitcoin, if you sell 1 BTC Mini 2021-08-28 Put $14,000 for $400. You will collect a premium of $4 [0.01] x [$400] and $140 will get position locked. 

In-the-money

At expiration, BTC rises to $16,000 the buyer should let their position expire worthless because they can sell BTC at the current market price which is higher than the strike price. Your locked collateral of $140 will be unlocked at 5pm settlement and be available for trading again. 

Out-of-the-money

BTC falls to $11,000 the buyer will exercise their option (right to sell BTC at $14K when BTC market price is $11k). The buyer's BTC (0.01 BTC) will be transferred to your account and your locked dollars ($140) will be transferred to the buyer.

You need USD available in your account to sell put options. See Fund Your Account.

  1. Click the Bid Price
  2. Enter # of Contracts & Price
  3. Click Sell/Short to confirm your order & lock USD collateral
  4. Review 
  5. Confirm Sell Order & Receive USD Premium

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Contracts: the number of contracts you want to sell. Minimum quantity = 1. 

If the long holder exercises their option on the expiration date, you will be buying 0.01 BTC or 0.1 ETH at the strike price for each contract.

Price: the price you receive for the put option. Options prices are quoted in terms of 1 bitcoin/ether.

Underlying: the amount of BTC/ETH you may be buying at expiration 

Premium: the total dollar amount you receive at the time of trade 

Break-Even = strike price - price

Min Credit = premium received

USD Locked collateral may be assigned at the strike price on the expiration date.

 

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