Strike Prices on BIOPset
An explanation of the strike price of a binary option on BIOPset.
by Munair and Gbenga Alaran.
Binary options are financial contracts that are either worthless or have predetermined value in the future depending on the underlying asset’s price. This gives them a different risk profile in comparison to traditional financial options, and their binary nature may make it simpler to speculate on price for some traders.
This article explains the significance of the strike price of a binary option for price speculators. In particular, it contrasts purchasing traditional financial options with binary options.
Suppose a trader wanted to profit from the upward or downward change in the price of a financial asset, such as a cryptocurrency like ETH, but didn’t want to take ownership of the asset. This kind of financial activity is called price speculation and the trader is called a price speculator.
One popular way to speculate on future asset prices is to purchase (or hold) traditional options contracts on the cryptocurrency.
Calls and Puts
Traditional financial options come in different varieties. Some options have fancy names like “straddles” and “iron condors”, but calls and puts are the fundamental building blocks of all traditional financial options.
When a speculator expects an asset’s price to rise, they buy a call. When they expect a fall in price, the speculator buys a put.
Traditional Options Contracts
Options expire. At expiration, traditional financial options give the holder the right, but not the obligation, to buy or sell an asset (like ETH) at a predetermined price. That predetermined price is called the strike price.
The strike price is the price threshold the asset’s future price (called the future spot price) must exceed (or fall short of) for the option holder to profit. [1]
Call option holders profit as long as the spot price at expiration exceeds the strike price. Put option holders profit as long as the future spot price at expiration falls short of the strike price.
The greater the difference between the future spot price and the strike price, the greater the profit or loss. This is not the case for binary options.
Binary Options Contracts
One non-traditional type of financial option is the binary option. They are also called digital or fixed-return options.
Binary options based on stocks and commodities have historically traded on centralized exchanges like the Chicago Mercantile Exchange (CME) and the North America Derivatives Exchange (NADEX).
With the advent of blockchains and smart contracts, decentralized binary options trading platforms for cryptocurrencies, like BIOPset, have emerged.
Unlike a traditional option whose payoff varies with strike price and future spot price, a binary option has a fixed payoff — as illustrated by the two charts below.
As the diagram on the left for a traditional call option indicates, the potential payoff increases as the market price (i.e. spot price) of the underlying asset increases. The payoff is potentially infinite.
Meanwhile, the diagram on right for a binary call option indicates a fixed payoff regardless of how high the spot price of the underlying asset goes.
For both traditional and binary options, the strike price is important because it is the breakeven point for the option holder.
The strike price of a binary option is the price threshold that a trader speculates the asset will be above or below at the expiration of the option.
Example
To illustrate how some high-low binary option trade could work, consider the following example:
Will the price of ETH be above $2,500 at 1600h on July 30?
Suppose a speculator thinks it will be and spends $100 (the option premium) to purchase binary call options contracts with a strike price of $2,500. If at expiration on July 30, the price of ETH is indeed above 2,500, then the payoff on the binary call option is a fixed percentage of $100. If the price of ETH is below 2,500, then the payoff is zero and the speculator loses their $100 option premium.
Conversely, if the speculator thinks that ETH will not rise above $2,500 at expiration, then buys a binary put option also with a strike of $2,500. If at expiration the price of ETH is indeed below $2,500, then they earn a payoff. If the price is above $2,500, then the payoff is zero. The speculator ends up losing their $100 option premium.
Assigned Strike Price
In the example above, the speculator had the option to choose a strike price. On platforms like BIOPset, the speculator cannot choose the strike price. The strike price is assigned by the protocol.
The strike price assigned by BIOPset is the spot price of the asset at the time the cryptocurrency is purchased. This makes trading binary options on BIOPset a simple up or down proposition.
Further Reading
To learn more about BIOPset, please consider reading:
Additional Links
Please reach out and keep in touch:
Telegram: https://t.me/BIOPset
Discord: https://discord.gg/4SRYBNdE3r
Twitter: https://twitter.com/BIOPset
Forum: https://biopset.freeforums.net/
- The speculator could also take a position on the other side of the option trade by writing (selling) the option. Writing options is beyond the scope of this introductory article.
