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Options provide the ability to control a large amount of an asset with a relatively small investment - the cost of the option or the premium. This is what is referred to as leverage. By using options, traders can amplify their potential returns without having to invest in the full cost of the underlying asset. However, this leverage can also magnify losses if the market moves against the trader's expectations.
The built-in leverage of options can offer significant opportunities for profit, but they also carry substantial risk. Therefore, options should be handled with care, ideally as part of a diversified trading strategy that takes into account the trader's risk tolerance and market understanding.
If you believe the price of a certain asset will rise, you can buy a call option, which gives you the right to buy the asset at the strike price. If the asset price goes up, you can buy the asset at the strike price (which is now lower than the market price) and sell it at the higher market price for a profit.
On the other hand, if you think the price of an asset will fall, you can buy a put option, which gives you the right to sell the asset at the strike price. If the price goes down, you can buy the asset at the lower market price and sell it at the strike price (which is now higher than the market price) for a profit.
The beauty of options in DeFi is that they provide a way to speculate on price changes without actually having to own the asset. This can be a way to manage risk and potentially make profits, but like all trading strategies, it's important to understand the risks and trade responsibly.