For Trading

Options have a rich palette of trading-related usecases and options volumes in traditional finance have been steadily growing

Below are some examples of a few simple applications of options. This is a very complex topic, you should do your own research. The purpose of this page is to showcase how versatile options are as a tool.

  • Implementing a Long Straddle Strategy in High Volatility Scenarios: When a trader possesses a volatility model that aligns with the options' Automated Market Maker (AMM) volatility, and the model projects a greater volatility than what is currently priced in the market, the trader typically initiates a long straddle strategy. This involves purchasing both a long put and a long call option, with an expiry matching the model's forecast and a strike price closely mirroring the asset's current price.

    In the event of a substantial price surge, which is likely given the anticipated heightened volatility, profits are generated from the long call option. Conversely, if the price dramatically plummets, the long put option becomes profitable. However, should the model's prediction be inaccurate and the market exhibits lower volatility than anticipated, the strategy could result in a loss. It's important to note that volatility often serves as an indicator of the range of price fluctuations, thus a pivotal factor in this trading strategy.

  • Should the trader project lower volatility than what the market anticipates, a reverse strategy to the aforementioned one can be employed, involving the shorting of both a put and a call option. This strategy, known as short straddle, is presently executable exclusively on central limit book exchanges.

  • In certain market scenarios, a trader may assess that there is a high likelihood for a marginal increase in price, but a slim chance of a significant decrease. To capitalize on this risk-reward imbalance, the trader would strategically procure a call option. This approach is favored because call options allow the trader to limit their potential downside risk while still maintaining the opportunity for unlimited upside profit. It ensures exposure to a potential price rise without the significant capital outlay required for owning the asset outright, while also capping the potential loss to the amount paid for the option in the event of a substantial price drop.

  • The options may also work as an alternative to going long/short an asset with stop loss.

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