There are other ways to profit from a crypto asset’s price rise rather than investing directly in it. One interesting way to reduce your risk and get the right to buy more of that cryptocurrency after it has risen but at a price much lower than its market price at that time is by using what is termed as a Call Option.
However, before we talk about call options and how they work, it’s worth taking a moment to remind ourselves that we don’t know of any crypto assets (or any other investment) with zero risks but with the potential for unlimited profits.
Remember, the risk is an integral part of the price we pay for a reward.
However, there are ways to significantly reduce or minimize RISK without giving up the profit potential. You could buy the asset outright or buy it via a ‘Call Option’ that gives you the right to buy the asset at a predetermined fixed price, without any obligation to exercise your right to buy it.
What is a call option?
A call option is a financial contract that gives the holder or (buyer) the right to purchase a stock, bond, commodity or another asset within a specified time period at a predetermined price.
The holder is not obligated to buy the asset, but he does not recover the fee paid to the writer (or seller) of the option. So in a call option, your total risk is known in advance and limited to the option’s cost, but your profit potential is unlimited.
However, let’s leave profit aside for the moment and quantify the maximum risk for any asset that is bought with the intention of selling it later at a profit.
How do call options work?
Imagine if we buy an asset for say $30,000, the very worst that can happen is that it goes to zero, and therefore our maximum loss is $30,000. On the other hand, if we bought the same type of asset for only $1,000, then our maximum loss is just $1,000.
With call options, our risk is even less because it’s limited just to the cost of the option.
Now let’s take a look at the profit potential. Ever since Crypto assets first became available for purchase, they have proven their capacity to double, triple and even increase 1,000 times over a few years.
For an asset bought at $30,000 to double, it has to increase in price by another $30,000 to reach $60,000 – not that easy. But for an asset bought at $1,000 to double, it only has to increase in price by another $1,000 to reach $2,000 – very much easier.
With a call option, the profit potential is magnified. Let’s say the call option for the right to buy CryptRight for $1,000 – costs $100. If the price does not reach above $1,000, you will not exercise your right to buy at $1,000.
However, If the price doubles to $2,000, you will sell it for $2,000 (since you own the call option) and exercise your call option right to buy it for $1,000. So your total cost (risk) was just $100, but your profit was $900. That’s a 900% return.
Call options can be a way to manage your risk.
Controversy surrounds crypto assets’ safety, chiefly because of their high volatility and the risks associated with coding issues. But call options can be a great tool to hedge against such risks precisely because they offer unlimited gains whilst limiting your loss to the relatively small amount you pay to hold the contract.
You could say call options are the perfect financial instrument to help you enjoy a good night’s sleep.