A Simplified Example: Suppose Bitcoin is trading at $250. A put option contract with a strike price of $260 expiring in a month's time is being priced at $15.00. You strongly believe that Bitcoin will fall sharply in the coming weeks due news or technical breakouts. So you paid $1,500 to purchase 100 put option covering 100 Bitcoin.Comparing with shorting Bitcoin with margin, to establish and hold the full position you will at least need to have $250 * 100 * 150% = $37,500 in your account.
A Week Later:XBT/USD is trading at $200.00 and your $260 put options are selling at $65.00;your profit owning 100 $260 put options are:
If Holding Options:Profit: ($65.00 - $15.00) * 100 = $5,000Return: $5,000/$1,500 = 333% or 3.33 X (of your initial investment)
Comparing with owning underlying:Profit: ($250.00 - $200.00) * 100 = $5,000Return: $5,000/$37,500 = 13.33% or 0.133 X (of your initial investment)Utilizing this strategy will allow you to generate the same return using significantly less money.