Introduction to options
Enjoy reading our short guide to options trading for beginners!

Introduction to Options

If you're a newbie trader, we recommend that you start your journey with the Futures section as these two instruments have much in common ;)
Options are one of the most widely used derivatives that are based on the inherent value of an underlying asset. But unlike futures contracts, options do not impose an obligation on the buyer to execute any of the actions on the time specified. In the traditional equity market, options are universally employed as a hedging tool that may induce a lower risk exposure and operate well if utilized in tandem with spot buying or futures trading to further hedge the risk.
Though the concept may seem to be pretty sophisticated, we have a very good example that will help you understand the nature of options.
Imagine you meet a very beautiful girl and want to invite her to a restaurant. Unfortunately, she's not yet sure whether she'll be able to join you, but she is very encouraged and all. You decide to book a table in the restaurant, but it turns out that the restaurant is not engaged in free reservations and you need to pay a small amount for it. You decide to pay for the reservation, but you don't know whether you will use this opportunity or not. This way, you pay a small amount to have a 100% chance to visit this restaraunt. Options trading is absolutely same.
One more example is devoted to one of the most popular use cases of options in trading:
You're a spot trader and you buy BTC at $30K anticipating it's growth. Though, you can never be 100% sure that your prognosis is correct, so you decide to create a put option (buy) position simultaneously. This way, you hedge your losses because if the price goes down, you will be able to extract profit from the options position and this profit will compensate for the losses of your spot trade.

A few important concepts for further understanding:

  • A call option gives the holder the right to buy an asset.
  • A put option gives the holder the right to sell an asset.
  • When you buy an option, you pay a premium for the right to trade at a set price within a predetermined time. Premium depends on volatility, execution time, and the underlying asset's price and is also an instrument to extract returns. To trade options with leverage, margin, or collateral is required.
  • The strike price of an option is the price at which a put or call option can be exercised.
  • Options can be of several styles with American and European being the most popular:
    • A European option may be exercised only at the expiration date of the option, i.e. at a single pre-defined point in time.
    • An American option on the other hand may be exercised at any time before the expiration date.
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Introduction to Options