Understanding the Basics of Options Trading

What You Should Know About Options Contracts

Options contracts provide traders and investors the right to buy or sell digital and financial assets at a predetermined price, without the obligation to execute the transaction. Unlike traditional trading, most options trading activity focuses on buying and selling the contracts themselves rather than executing them and acquiring the underlying asset.

American options offer greater flexibility as they can be exercised at any moment before expiration, while European options are limited to exercise only on the expiration date. To make informed decisions, it is essential to master the concepts of call and put options, the mechanisms for determining contract prices, expiration dates, and exercise prices.

Key Advantages of Trading Options Contracts

Imagine you have the right to purchase a specific property at a fixed price over a defined period of time, without the immediate obligation to buy. This concept illustrates the essence of options contracts - the right without the obligation. By paying a certain premium ( option price ), you gain the opportunity to benefit from market movements without immediate ownership of the asset.

What distinguishes this model is that most of the profits come from the change in the value of the contract itself, not from exercising the right. If the value of the option increases, you can sell it for a profit without having to buy the underlying asset at all. This gives you tremendous flexibility in trading strategies.

Basic Types of Options Contracts

Buy Option (Call Option)

A call option gives you the right to acquire an asset at a specified price ( strike price ) before or on the expiration date. You use this type when you expect the price to rise. If the actual price rises above the strike price, you can buy the asset at the lower price and sell it at the higher price, making a profit. Alternatively, you can sell the contract itself if its value increases before expiration.

Sell Option ( Put Option )

A sell option gives you the right to sell an asset at a specified price before the expiration date. You buy this type when you expect the price to decrease. The lower the price goes, the more valuable the contract becomes, allowing you to make profits. Like call options, these contracts can be sold before they expire to take advantage of price changes.

Assets that Options Can Be Traded On

• Cryptocurrencies: Bitcoin (BTC), Ethereum (ETH), Binance Coin (BNB), Tether (USDT), and others.
• Stocks: Shares of major companies such as Apple, Microsoft, and Amazon
• Indicators: Global stock indices such as S&P 500 and Nasdaq 100
• Goods: gold, oil, metals, and other commodities

The Basic Components of a Options Contract

execution price

The predetermined price at which you have the right to buy ( in a call option ) or sell ( in a put option ) remains fixed throughout the contract period regardless of market movements. For example, if you set an exercise price of $50,000 for a Bitcoin contract, this is the price at which you will be able to buy or sell.

expiration date

A specific date on which the contract expires. After this date, the option cannot be executed. The durations of options range from a few weeks to several years depending on the contract and the platform.

option price ( installment )

The cost you pay for the right to buy or sell an asset. This amount remains yours whether you exercise the option or not. It is determined based on several factors including the current price of the asset, the time remaining until expiration, and market volatility.

contract size

It specifies the amount of the underlying asset covered by the contract. For stock options, it is usually 100 shares. However, the contract sizes for cryptocurrency options and indices may vary, so it is important to check the details before trading.

Factors Influencing Option Price

The contract price does not remain fixed but changes continuously according to:

• Current asset price: The closer the market price gets to the strike price, the higher the value of the option.
• Market Volatility: High volatility increases the value of options.
• Time Remaining: Long-term contracts are usually more expensive than short-term ones.
• Interest rates: indirectly affect the value of contracts

This means you can profit from the changes in the contract price without having to execute it physically.

Profit and Loss Cases

The option is in the range ( In The Money - ITM)

A choice is described as winning when market conditions are in your favor:

• Call Option: The market price is higher than the strike price
• Sell Option: Market price is lower than strike price

The option at the range ( At The Money - ATM )

When the market price is exactly equal to the strike price. In this case, the contract is neither losing nor winning.

Out Of The Money - OTM (

The option is described as a loser when the conditions are adverse:

• Buy Option: Market price is lower than the strike price
• Sell option: The market price is higher than the execution price.

Greek Risk Measurements

Traders use Greek metrics to understand and assess potential risks:

Delta )Δ(: measures the sensitivity of the option's price to changes in the underlying asset. A delta of 0.5 means that the option will rise by $0.5 for every $1 increase in the underlying asset.

Gamma )Γ(: measures the rate of change of delta itself. It helps you understand how the sensitivity of an option will change as the market evolves.

Theta )θ(: measures time decay. As the expiration date approaches, the value of the option ) generally decreases ( due to the passage of time.

Vega )ν(: Measures the impact of market fluctuations. Higher volatility usually means a higher value for options.

Ro )ρ(: Measures the impact of changes in interest rates on the option price. Its effect is usually limited compared to other factors.

The difference between American and European options

American options: Provide greater flexibility because you can exercise them at any time before expiration. This gives you more options in your strategies.

European options: are limited to execution on the expiration date only. This restricts flexibility but may also affect the contract price.

Most trading platforms offer European options for settlement and simplification reasons. In this case, upon the expiration of the contract, if it is in your favor, it is settled automatically. Settlement is usually done in cash rather than delivering the actual asset.

Concluding Points

Options provide a powerful tool for traders to diversify their strategies and take advantage of market movements with less capital than direct trading. The right without obligation is the fundamental principle that makes these instruments attractive.

The majority of profits in options trading do not come from executing contracts but from buying and selling the contracts themselves. This means you are trading on changes in value rather than the underlying assets directly.

But with every opportunity comes risks. Understanding the basic concepts - execution prices, expiration dates, pricing mechanisms, and Greek metrics - is very essential before starting actual trading. Take your time to learn and practice before risking your capital.