What Are Options? A Comprehensive Guide for Beginners

Basic Concepts of Options Trading

Options trading ( is the activity of buying and selling options contracts, rather than directly buying and selling the underlying assets such as cryptocurrencies or stocks. This is one of the most complex financial instruments but also provides many profit-making opportunities for knowledgeable traders.

The unique point of options is the word “right” - you have the right to buy or sell an asset at an agreed price, but you are not obligated to do so. This is completely different from futures contracts, where you are required to execute the transaction.

Most options traders do not wait until the expiration date to trade the underlying asset. Instead, they buy and sell the option contracts themselves to profit from changes in its value. This is the most common way of trading options in the market.

Main Types of Options

) Call Option ###

A call option gives you the right to buy the underlying asset at the strike price ( on or before the expiration date. You should buy a call when you expect the price to rise.

For example: You buy a BTC call at 40,000 USD with a fee of 1,000 USD. If the price of BTC rises to 45,000 USD, the value of the call increases accordingly. You can sell the call to make a profit without actually purchasing BTC.

) Put Option (

A put option allows you to sell the underlying asset at the strike price before the expiration date. You should buy a put when you expect the price to decrease.

For example: You buy a put option on ETH at a price of 2,000 USD. If the price of ETH drops to 1,500 USD, your put option is profitable. You can exit the position to lock in profits or continue to hold.

Important Components of Options Contracts

) Expiration Date ###

This is the final specified date on which the option contract is valid. After this date, the option will expire and can no longer be exercised or traded.

Options can have different time frames:

• Short term: A few weeks
• Medium term: A few months
• Long-term: Several years

( Actual Price )Strike Price###

The strike price is a fixed price agreed upon in the contract. If you decide to exercise the option, this will be the price you have to pay ( for a call) or receive ### for a put(.

The relationship between the strike price and the current market price of the underlying asset determines the true value of the options contract.

) Option Fee (Premium)

Premium is the cost you pay to have the right to buy or sell an asset. This is a non-refundable amount, regardless of whether you ultimately execute the contract or not.

Factors affecting the premium:

• The difference between the current price and the exercise price
• Time remaining until the due date
• The volatility of the underlying asset price
• Supply and demand situation in the market

( Contract Size

Typically, a stock option contract represents 100 shares. However, for cryptocurrencies or other assets, the size may vary. Always carefully check the contract information before trading.

Underlying Assets Available for Options Trading

Options can be written on many types of assets:

• Cryptocurrency: Bitcoin )BTC###, Ethereum (ETH), BNB, Tether ###USDT( and thousands of other tokens
• Stocks: Apple )AAPL(, Microsoft )MSFT(, Amazon )AMZN(, Tesla )TSLA(, etc.
• Market Indices: S&P 500, Nasdaq 100, Nikkei 225
• Goods: Gold, oil, copper, coffee
• Foreign Currency: Major currency pairs in the forex market

Important Terms in Options Trading

) In The Money (ITM), At The Money (ATM), Out Of The Money ###OTM(

These three terms describe the relationship between the strike price and the current market price:

For Call Option:

• ITM: Market price > Strike price ) is profitable if exercised (
• ATM: Market price ≈ Strike price )break even(
• OTM: Market price < Strike price )loss if exercised(

For Put Option:

• ITM: Market price < Strike price ) is profitable if exercised (
• ATM: Market price ≈ Exercise price )break even(
• OTM: Market price > Strike price )loss if executed(

) Greek Letters (

Options traders use 5 Greek letters to measure the risk and sensitivity of contracts:

• Delta )Δ(: Measures the rate of change of the option price when the underlying asset price changes by 1 USD
• Gamma )Γ###: Measures the rate of change of Delta
• Theta (θ): Measures the time decay - how much the option will lose value as it approaches expiration.
• Vega (ν): Measures sensitivity to market fluctuations - how much the option price changes when volatility increases by 1%
• Rho (ρ): Measure the impact of interest rates on option prices

Trading Before Expiration

An important concept to understand is that you do not need to wait until the expiration date to make a profit. Options contracts are traded very actively in the market.

The price of the option contract changes continuously based on:

• Market conditions
• Time remaining until due date
• Price volatility of the underlying asset

Traders can buy contracts and then sell them to make a profit ( or cut losses ) without having to exercise the right to buy/sell the underlying asset. Most options trading occurs this way.

The Difference Between American and European Options

( American Options )

Allows execution at any time before the expiration date. This provides greater flexibility but often comes with higher fees.

( European Options )

Can only be executed on the exact maturity date. Usually has lower fees but is less flexible.

Note: In actual trading, this difference has little impact as most traders sell contracts before expiration rather than exercising them.

Things to Remember When Trading Options

1. Understand the mechanism: Before trading, you must thoroughly understand how options work, important terminology, and the factors that affect the price.

2. Risk management: Options have the potential to yield high profits but also carry high risks. Always set stop-loss and do not risk too much capital.

3. Check the contract: Before trading, carefully review the details: underlying asset, expiration date, strike price, fees, contract size.

4. Update Knowledge: The financial market is always changing. Keep an eye on the news, learn from the experiences of other traders, and improve your skills.

5. Start small: If you are a beginner, start with a small amount to gain experience before scaling up your trading.

Options trading (options) is a powerful tool in the hands of those who understand how to use it. With solid knowledge and good risk management, you can take advantage of opportunities to profit from various types of assets in the financial market.