A Short Put Strategy involves selling a put option contract, granting the buyer the right to sell an underlying asset at a specified strike price before expiration, in exchange for receiving a premium. In crypto institutional options trading, this strategy is employed with a bullish or neutral outlook on a digital asset, aiming to generate income from the premium while accepting the obligation to purchase the asset if its price falls below the strike.
Mechanism
The mechanism functions by a seller receiving the premium upfront, which is retained if the underlying crypto’s price remains above the strike price until expiration. If the price drops below the strike, the seller is obligated to buy the asset at the higher strike price. This position carries uncapped downside risk if the asset price falls significantly, though it also allows for potential asset acquisition at a perceived discount.
Methodology
The strategic application of a short put strategy includes income generation from premiums, expressing a moderately bullish view, or acquiring a target cryptocurrency at a specific price. Risk management often involves selling puts on assets the institution is comfortable owning or combining it with other positions to create defined-risk structures. This methodology extends knowledge by offering a systematic approach to monetize time decay and capitalize on expected price stability or modest appreciation in crypto markets.
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