Cryptocurrency Options Strategy, Analysis, and Valuation

Abstract

Options play a significant role in the financial markets. These types of securities’ values are derived from other securities such as stocks or bonds and, in recent years, cryptocurrencies. There are two types of option contract structures: American and European. Uncovered, or naked, options are buying or selling options primarily on speculation, where the investor does not hold any ownership in the underlying asset, in this case stock or cryptocurrency, from which the option premium is derived. The following three strategies are buying and selling call options, put options, and straddles. Black-Scholes-Merton model is one of the first pricing models that was used to calculate the fair price for a call or a put option premium based on five variables such as current spot price (cryptocurrency), strike price, volatility, time, and risk-free rate. It’s important to reintroduce some mathematical concepts that are essential for valuating options, including the natural logarithms, probability theory, and normal distribution.