Options
derivatives contract
Options are derivative contracts that grant the holder the rightÔÇöbut not the obligationÔÇöto buy or sell an underlying asset at a specified strike price before or at a set expiration date. In crypto and traditional markets alike, options are leveraged tools used for hedging, speculation, and income generation. There are two main types: call options (right to buy) and put options (right to sell). Options strategies require knowledge of premiums, volatility, and timingÔÇömaking them powerful but complex instruments.
Use Case: A trader holding a large amount of ETH buys put options as insurance against a short-term decline, allowing them to lock in a minimum exit price while maintaining upside exposure.
Key Concepts:
- Call Option ÔÇö Gives the right to buy the underlying asset at the strike price before expiration.
- Put Option ÔÇö Gives the right to sell the underlying asset at the strike price before expiration.
- Premium ÔÇö The cost paid to buy the option, representing the maximum loss for the buyer.
- Implied Volatility ÔÇö A measure of expected future price movement, heavily impacting option pricing.
Summary: Options are versatile contracts that enable market participants to hedge, speculate, or earn income with defined risk. While institutions use them for sophisticated strategies, retail traders must understand risk-reward dynamics and volatility metrics before deploying capital in options markets.
| Option Type | Right to… | Used When… | Risk Profile |
|---|---|---|---|
| Call Option | Buy the asset | Expecting price to rise | Limited loss, unlimited gain |
| Put Option | Sell the asset | Expecting price to fall | Limited loss, strong downside protection |
| Writing Options | Obligation to fulfill the contract | Earn premium; neutral to bearish or bullish view | High risk if uncovered |