Holding a call to speculate

Holding a call to speculate

The long call option strategy is the most basic option trading strategy, whereby a user buys call options with the belief that the price of the underlying asset will rise significantly beyond the strike price before the option expiration date.

Sam is a ETH hodler and he is bullish due to the growing DeFi ecosystem on Ethereum. He is holding 1 ETH already. To maximize his gains if the ETH price goes up in the near future, Sam buys 1 ETH call with the strike price of $700 and the expiry of 15 days. The premium is $70 for each contract.

If the price grows by 20% to $840 in two weeks, Sam will get $140 ($840-$700) by exercising the call, and the return is 100% (($140-$70)/$70). The call gives Sam a 5x leverage in return.

If the price drops by 20% to $560 in two weeks, Sam will not exercise the call option and $70 is all he can lose. But for holding one ETH, Sam may lose $140 from the collapse.

If Sam is extremely bullish and he can even deposit ETH on Makerdao, Compound or Aave, to borrow stable coins to buy call options. This will give him even further leverages, and higher risks.

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What a powerful tool. Maximizing profits while limiting your risk. Options are a traders best friend :kissing_heart:

In this example, does Sam have to actually pay or deposit 700$ when the price hits $840 and he want to exercise the call?

If the options are physically settled, he has to pay 700$ and he will get 1 ETH in return.
If the options are cash-settled, he doesn’t need to pay. He will be transferred with the difference directly.

FinNexus options are cash-settled.

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Thanks Ryan for the clarification Ryan! Can we add those details in the examples in FinNexus docs as well, think it would be helpful for beginners like me.

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We already added something here Options Strategies - FinNexus Documentation

We will keep updating the docs page. Thank you for your suggestion.