Understanding the Underlying Forward Price
Let's unlock the concept of the Underlying Forward Price, a term you'll often encounter in the world of cryptocurrency options trading. This term is essential in the sphere of financial markets, but it can appear quite daunting at first glance. But don't worry! Here's an easy guide to help you get a grip on it.
What is the Underlying Forward Price?
In simple terms, the Underlying Forward Price refers to the agreed price for a specific cryptocurrency that you as a buyer are willing to purchase or a seller is ready to sell at a future date. This prearranged price doesn't change, regardless of the market fluctuations that the cryptocurrency may undergo in the future.
Why is it Relevant in Option Trading with Cryptocurrencies?
Understanding the Underlying Forward Price is crucial in options trading because it helps traders anticipate potential profits or losses. For instance, if the underlying forward price of a cryptocurrency is lower than the market price at the expiration of the option, a call option could be executed profitably. Conversely, if the forward price is higher than the market price, a put option could present a profitable situation.
How is the Underlying Forward Price Calculated?
The Underlying Forward Price is usually calculated using the spot price (current market price) of the cryptocurrency, plus any costs associated with holding the cryptocurrency (also known as the cost of carry) subtracted by any potential earnings from the cryptocurrency during the term of the contract. It’s worth mentioning that the equation varies slightly with different cryptocurrencies due to their distinct features.
Effect on Your Trading Strategy
Being familiar with the Underlying Forward Price concept can help you in analyzing and foreseeing market trends, which is significant in devising sound trading strategies. For instance, if you predict the underlying forward price of a cryptocurrency to increase in the future, purchasing a call option may be a good decision.
