On November 1, the Cryptocoin Insurance Company is launching its ICO. It founds the first stock exchange and an insurance company that allows insuring clients’ deposits from falling. Most clients of cryptocurrency exchanges perceive options as something far and extremely odd. Let’s try to briefly understand the basics and define what traders’ benefits.
An option is a contract that enables a buyer to buy or sell a certain asset at a given price within a strictly limited time period. It is important to note that the contract provides the right, rather than establishes the obligation to perform any actions.
The mechanics of working with option contracts can be best of all shown through the simplest example: a person wants to buy real estate and has chosen the right option. However, he has not got enough money at the moment, and he will get it only in a month.
In this case, it is possible to solve the problem by using the options mechanics. The buyer agrees with the owner of the property that he will have the right to purchase the real estate at the price of $200,000 within a month, and he will pay $3,000 for this opportunity.
Further, there are two possible scenarios:
- Thus, you have agreed that you can buy the property at the defined price. Suddenly you happened to learn that the highway will go through this lot! It is fabulous luck! The price of this property is rising up to $500,000. The owner may seem to sell it at this price, but he has already provided you with the right to buy the property at the initial price. This is how the buyer has the opportunity to earn almost $297,000 if he resells the house at the new market price. The formula for calculating the profit is as follows: we will minus the initial price – $200,000 – from the new market price – $500,000 and plus $3,000 paid for the option.
- On the other hand, there can be another, less joyful situation. For example, having examined the property more attentively, the buyer found out that the walls contained poisonous asbestos, local hooligans organized their meetings near the house in the mornings, and the ground waters constantly flow into the basement. Now the house does not seem so perfect and, certainly, there is no wish to buy it anymore.
However, you have not yet bought the house. You have only bought the option that does not oblige you to make the main deal! Thus, although you lose $3,000 (you have initially paid for the option), you do not need to buy the property you do not need any more at the price of $200,000.
What is the moral of the story?
The first thing you must always remember: when you buy an option, you get the right, rather than an obligation.
Secondly, there is no need to do anything with the option. For example, you have purchased it, waited until its expiry, and did not do anything with it. In this case, you simply lose the price you have paid for it. In some situations, this can be more profitable than to do anything with it.
In fact, an option is a contractual right for the basic asset, for example, the property as mentioned above. Today the most wide-spread asset of this type is a share of any company, for example, IBM.
Basic concepts of any trader include the meaning of such words as “call” and “put”
A put allows the contract holder to sell an asset at a specific cost at a specific time interval. “Put” means that the buyer waits for the option to expire and expects the value of the share to decrease.
On the contrary, a call allows the buyer to buy an asset at a given price within a period of time.
Actors of stock options
In general, there are four types of players in the market:
- Put buyers,
- Call sellers,
- Put sellers, and
- Call buyers.
The option buyer is called a holder. The seller of option contracts is called a “writer”.
Contract holders are not obligated to buy or sell this asset. They have the right to do this. It is quite different for writers: they are obliged to buy and sell: they gave a public promise and must do it at any trader’s wish.
To get income, the value of the basic asset must exceed the fulfillment cost if it is about a call option, and be lower if we talk about a put option. In any case, the transaction must be made before the option expires.
Quoted options are those contracts that are allowed to be traded in centralized stock exchanges. Such options are characterized by a fixed date and a strictly defined price. Quoted options may also be called contracts. They are one hundred shares of any organization.
American and European options
At the moment, two types of option contracts – European and American – are considered to be classical. Of course, the difference is not that European options traded in Europe, and American ones – in the United States. It is even simpler: a European option has a fixed expiration date (i.e. it cannot be sold or bought until the option date expires), while an American option can be closed before the expiration date defined by the contract (i.e. at any time it can be bought or sold at the exchange at the demand/offer price at any time).
An advantage of American options that provide the possibility of early expiration is that a trader can get his profit at any time. This can have a considerable impact on his income because the option profitability is not constant and you need an opportunity to choose the time of selling.
In any case, trading options involve risk –transactions participants in this way or another earn from losses of other participants. When entering trading options contracts, it is important to clearly understand the consequences of your actions.
Cryptocoin Insurance launches an exchange that does not differ from ordinary options exchanges.
These are not binary options from Forex brokers people avoid. A classic options exchange is entering the market. It allows betting on the market rise and fall, earning money on tokens changes, and hedging risks.
One of the main difficulties the company has to overcome is the creation and setting of algorithms adjusted precisely for today’s realities of the cryptocurrency market.
On the one hand, assets function differently from gold or oil. On the other hand, the market operates 24 hours, 7 days a week, which creates completely different specifics, for example, due to the lack of gaps. The third point to pay attention to is short sales. On the stock market, they can be released through a short sale of the basic asset. The crypt does not provide such an opportunity. That’s why it is possible to assume the occurrence of many short positions because of purchasing put options.
If the team manages to deal with all nuances and make a friendly interface (it is much more difficult than the one we got used to when buying/selling bitcoin), it will certainly make a success, at least because of the large demand and complete lack of competition.
You can purchase Cryptocoin Insurance tokens on a closed presale before November 1, or during the ICO that starts on this day.
Telegram chat: https://t.me/ccin_official