An option contract gives the buyer (the owner) the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price and a specified time.

**Call options**

The payoff of a call is defined as the following:

payoff = max(0, PriceT - StrikePrice) / ConversionRate

where PriceT is the XBTCUSD index at the expiry time. The net profit of a contract is the above minus the contract price and commission.

Therefore, if you buy a call option, you expect PriceT to be higher than your strike price, and the higher PriceT, the more profit.

**Put options**

The payoff of a put is defined as the following:

payoff = max(0, StrikePrice - PriceT) / ConversionRate

where PriceT is the XBTCUSD index at the expiry time. The net profit of a contract is the above minus the contract price and commission.

Therefore, if you buy a call option, you expect PriceT to be higher than your strike price, and the higher PriceT, the more profit.

**Example**

You pay 0.05 BTC for a XBTCUSD call option with strike price 500 and expiry next Friday. If XBTCUSD becomes 550 at the end of next Friday, you will get payoff

550 - 500 = 50 (USD).

This dollar denoted profit is then converted into BTC according to a pre-determined conversion rate (supposedly 530) and credited into your account, and your profit will be the payoff minus the initial 0.0005 BTC premium, i.e.

(550 - 500)/530 - 0.05 ≈ 0.094 - 0.05 = 0.044 (BTC).

Otherwise if the price is below 500, you get no payoff and thus lose the original 0.05 BTC.

Options can be used to hedge the high risk of holding Bitcoins. E.g., if you have 3 BTC, you can buy 3 put options to hedge the risk so that if the price drops, you will get about 100% compensation from the options. Otherwise, if the price goes up, you still enjoy the value increase of Bitcoins, which is a major advantage compared with futures.

## Comments

1 comment

Mode of payments?

Please sign in to leave a comment.