Options Trading 101: A Simple Guide for Everyone
Welcome to the world of options trading! If you've heard about options but find the concept daunting, worry not. This guide is designed to simplify options trading so that anyone, including your grandma, can understand it.
What Are Options?
Options are financial instruments that give you the right, but not the obligation, to buy or sell an asset at a specified price before a certain date. They can be used for various purposes, including hedging (protecting your investments against price drops), speculation (profiting from price movements), and managing portfolio risk.
Types of Options
There are two main types of options:
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Call Options: If you buy a call option, you have the right to buy an asset at a specific price (known as the strike price) before the option expires. You would buy a call option if you expect the asset's price to go up.
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Put Options: If you buy a put option, you have the right to sell an asset at the strike price before the option expires. You would buy a put option if you expect the asset's price to go down.
Example of a Call Option
When it goes your way: Suppose you believe that the price of Ethereum (ETH) will increase in the next month. You buy a call option with a strike price of $2,000 that expires in one month. If ETH's price rises to $2,500 before the option expires, you can exercise your option to buy it at $2,000, then potentially sell it immediately on the market for $2,500, making a profit of $500 (minus any fees and the cost of the option).
When it doesn’t go your way: If the price of Ethereum does not rise above $2,000 before the option expires, the option becomes worthless. You lose the entire amount you paid for the option, known as the premium. If the premium was $150, your loss would be limited to this amount.
Example of a Put Option
When it goes your way: Imagine you think that the price of Bitcoin (BTC) will drop in the near future. You buy a put option with a strike price of $30,000 that expires in one month. If BTC's price falls to $25,000 before the option expires, you can exercise your option to sell it at $30,000, even if the market price is $25,000. This can result in a profit (minus any fees and the cost of the option).
When it doesn’t go your way: If the price of Bitcoin does not fall below $30,000 before the option expires, the put option becomes worthless. You would lose the premium paid for the option. For example, if the premium was $200, your loss would be confined to this initial investment.
Why Trade Options?
Options allow you to speculate on the price direction of assets with a relatively low upfront investment compared to buying the asset outright. This can result in higher returns. However, it's important to remember that options can also lead to losses, which can be substantial.
How Options Trading Works on Carmine Finance
Carmine Options on StarkNet makes trading options accessible and straightforward. Here’s a step-by-step guide on how it works:
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Create an Account: First, you'll need to set up a Starknet wallet like Argent or Braavos and connect the wallet to the Carmine Options app.
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Select Your Asset: Choose the asset you want to trade. Currently ETH, STRK and wBTC options are available to trade.
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Choose an Option Type: Decide whether you want to trade call options or put options based on your market expectation.
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Select Your Strike Price and Expiry: Choose the price at which you’d like to buy or sell the asset and select when your option will expire.
Conclusion
Options trading involves potential highs and lows. While they offer the opportunity for substantial profits with limited investment, the risk of losing the entire premium is significant if the market does not move as expected. This inherent risk-reward nature of options makes it vital to invest wisely and consider both potential outcomes before entering a trade.
Carmine Options serves as an automated market maker, offering the opportunity for anyone to buy and sell options on the Starknet network at a fair price.
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