Understanding the Basics of Contract Trading

What You Need to Know About Options

Trading Options gives you the right to buy or sell an asset at a fixed price without being obligated to do so. The key word here is “right” – you are not obliged to execute the contract but have the option.

Traders do not wait until the contract expires. Instead, they buy and sell the Options themselves before their expiration, allowing them to profit from changes in the contract's value without owning the actual asset.

Options contracts come in two types:

• American: It can be executed at any time before expiration, providing greater flexibility.
• European: Only executed at the expiration date

Basic Components of Options Contract

Execution Price

It is the predetermined price at which you can buy ( in a call option ) or sell ( in a put option ) for the underlying asset. Regardless of market fluctuations, this price remains fixed as long as you are within the allowed time frame.

Expiration Date

The date on which the contract ends and you can no longer execute or trade it. These periods can range from weeks to full years, and directly affect the value of the contract.

Options price ( installment )

The cost you pay for the right to buy or sell the asset. If you do not exercise the contract, this amount is your only loss.

contract size

A stock option typically covers 100 shares, but in cryptocurrencies and indices, the size may vary, so check the contract details before trading.

The difference between Call Options and Put Options

Buy Option (Call)

gives you the right to buy the asset at the strike price. You use it when you expect the price to rise:

• If the price actually rises, you buy at the low price and sell at the higher market price.
• If the value of the contract itself increases, you sell it to another buyer and make a profit without owning the asset.
• The loss is limited to the contract price you paid.

Sell Option (Put)

Gives you the right to sell the asset at the strike price. You use it when you expect the price to drop:

• If the price drops below the execution price, you sell at the higher price and buy at the lower price.
• The lower the price, the higher your potential profits.
• You can sell the contract before it expires if its value increases.

Assets on which options can be traded

In financial markets, you can trade Options on:

Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), BNB, and Tether (USDT), and others.

Stocks: Shares of major companies like Apple, Microsoft, and Amazon

Indicators: General market indicators such as S&P 500 and Nasdaq 100

Commodities: gold, oil, and other raw materials

Key Terms in Profitability

When trading options, you must understand these three terms:

In money (ITM):

• Options to buy: Market price is higher than the exercise price ✓ Profitable
• Sell Option: Market price is lower than execution price ✓ Profitable

At money (ATM): Market Price = Execution Price (Break-even)

Out of the money (OTM):

• Buy Option: Market price is lower than strike price ✗ No intrinsic value
• Sell Option: Market price is higher than strike price ✗ No intrinsic value

The Five Greek Risk Metrics

Professional traders use these metrics to understand the risks and movements of options prices:

How Contract Prices Evolve

The price of options is not fixed. Several factors affect it:

• Current asset price – daily fluctuations directly affect
• Volatility – Calm markets reduce the value of options, while volatile markets increase it.
• Time Remaining – As the expiration date approaches, the time value decreases.
• Execution Price – The distance between it and the current price determines the intrinsic value.

This means you can buy a contract and sell it later for a profit or loss before it expires.

Critical Point: Cash Settlement

When executing an options contract, the actual asset is not delivered. Instead, the parties exchange the cash difference:

If the purchase contract “in cash” is settled, you receive the difference between the market price and the execution price in cash. This simplifies the process and avoids the complexities of transferring assets.

Key points to remember

✓ Options give you rights, not obligations – you choose

✓ Most traders deal with the same contracts, not the assets.

✓ Understanding the components of the contract ( price, execution, and validity ) is essential before starting

✓ The Greek metrics help you manage risks better.

✓ Market fluctuations and price changes create opportunities for profit and loss.

Trading Options provides great flexibility in financial markets, but it requires a deep understanding of the underlying concepts before starting any actual investment.