Module 8: Crypto Options
Put Options
Chapter 3 of 14 · about 5 minutes
3.1 Node's insurance policy
Node held 1 BTC as a long-term investment, bought well below today's price of $100,000. Node didn't want to sell, but a big economic announcement was coming in a few weeks, and a sharp drop seemed possible.
In Module 7, Chapter 12, Node had hedged with a short perp. "That worked," Node said, "but I gave up half my upside, and I had to manage margin the whole time. Is there something simpler?"
"Buy a put," said Hash. "It's the closest thing in crypto to house insurance."
3.2 Buying a put
A put gives the right to sell at the strike price. Node buys a $90,000 strike put expiring in 30 days, for a premium of $2,251.
At expiry, the put is worth:
Put value at expiry = maximum of (strike − price at expiry, 0)
Profit = put value at expiry − premium paid
Break-even = strike − premium = $90,000 − $2,251 = $87,749
| BTC at expiry | Put value | Put profit or loss |
|---|---|---|
| $110,000 | $0 | −$2,251 |
| $90,000 | $0 | −$2,251 |
| $87,749 | $2,251 | $0 (break-even) |
| $80,000 | $10,000 | +$7,749 |
| $60,000 | $30,000 | +$27,749 |
Chapter 3 · The payoff of a put
A long $90,000 strike BTC put bought for $2,251. Above the strike the buyer loses only the premium, a flat line in the loss zone. Below the strike, profit rises one-for-one as the price falls. The break-even is the strike minus the premium, $87,749; at $80,000 the put makes $7,749 and at $60,000 it makes $27,749.
3.3 The protective put
Combined with Node's 1 BTC, the put creates a protective put: a floor under the holding's value.
| BTC at expiry | Value of 1 BTC | Put value | Total | Change from $100,000, after premium |
|---|---|---|---|---|
| $130,000 | $130,000 | $0 | $130,000 | +$27,749 |
| $110,000 | $110,000 | $0 | $110,000 | +$7,749 |
| $100,000 | $100,000 | $0 | $100,000 | −$2,251 |
| $90,000 | $90,000 | $0 | $90,000 | −$12,251 |
| $70,000 | $70,000 | $20,000 | $90,000 | −$12,251 |
| $50,000 | $50,000 | $40,000 | $90,000 | −$12,251 |
No matter how far BTC falls, Node's total value can't drop below $90,000 at expiry. Node's maximum loss is $12,251: the $10,000 gap between today's price and the strike, plus the $2,251 premium. And Node keeps all the upside, minus the premium.
"That's exactly what I wanted," said Node. "A floor, without giving up the upside."
"And without any margin to manage or liquidation risk," said Hash. "The cost is the premium. If nothing bad happens, it's gone, like a year of house insurance with no fire."
3.4 Choosing the protection level
Like insurance deductibles, put strikes trade off cost against protection.
| Put strike (30 days, BTC at $100,000) | Premium | Floor on 1 BTC | Maximum loss including premium |
|---|---|---|---|
| $100,000 | $6,284 | $100,000 | $6,284 |
| $95,000 | $3,948 | $95,000 | $8,948 |
| $90,000 | $2,251 | $90,000 | $12,251 |
A higher strike gives more protection but costs more. A lower strike is cheaper but only protects against bigger falls. Chapter 11 discusses how to choose, and how to reduce the cost with a collar.
3.5 Puts for speculation
Puts can also be used to bet on a decline without holding the underlying. A trader who expects BTC to fall can buy a put instead of shorting a perp.
| Short 1 BTC perp | Buy 1 BTC $100,000 put ($6,284) | |
|---|---|---|
| If BTC falls to $85,000 | +$15,000 | +$8,716 |
| If BTC rises to $115,000 | −$15,000, or liquidation at high leverage | −$6,284 |
| Liquidation risk | Yes | No |
| Ongoing cost | Funding (may receive or pay) | Premium paid up front |
As with calls, the put buyer's loss is capped at the premium, while the perp short's loss grows as the price rises.
3.6 Selling a put
The put seller receives the premium and takes on the obligation to pay the put's value if the price ends below the strike. Economically, it's like agreeing to buy the asset at the strike price if it falls there.
| BTC at expiry | Seller's profit or loss on the $90,000 put ($2,251 premium) |
|---|---|
| $110,000 | +$2,251 |
| $90,000 | +$2,251 |
| $87,749 | $0 |
| $70,000 | −$17,749 |
| $40,000 | −$47,749 |
The seller's maximum profit is the premium. The maximum loss is large, though unlike a naked call, it's bounded because the price can't fall below zero.
Put selling backed by enough cash to buy the asset at the strike is called a cash-secured put, a popular way to earn income while waiting to buy at a lower price. Chapter 12 covers it.
3.7 Puts are often more expensive
In crypto markets, puts with strikes below the current price often cost more than calls the same distance above it, because many holders want crash protection, and crashes in crypto tend to be sudden. This pattern, called skew, varies over time. During strong bull markets, calls can become relatively more expensive instead. Chapter 9 explains skew in detail.
3.8 Try it yourself
Find the 30-day BTC puts at strikes roughly 5%, 10%, and 20% below today's price. For each, calculate the floor and maximum loss if you held 1 BTC and bought that put. Then compare the cost of each put as a percentage of your holding. How much would a year of rolling monthly protection at the 10% level cost, if premiums stayed the same?
Key takeaways from this chapter
- A put's value at expiry is the strike minus the price, or zero; break-even is the strike minus the premium.
- A protective put creates a floor under a holding while keeping the upside, minus the premium.
- Higher put strikes give more protection at higher cost, like a lower insurance deductible.
- Puts can express bearish views with capped loss and no liquidation, unlike short perps.
- Put sellers earn the premium but take on large losses if the price falls far below the strike.
- In crypto, downside puts are often priced higher than equally distant calls, though this varies.