Basics of Options Trading: A Complete Guide

A few words about the essence

Options trading is one of the most flexible ways to interact with financial markets. Unlike direct asset purchases, options allow you to acquire the right to buy or sell at a fixed price, but without the obligation to do so. It is this flexibility that makes them attractive to many traders.

The main thing to know: profit in options trading often comes not from executing contracts, but from trading the contracts themselves. Traders buy and sell rights, earning income from price fluctuations rather than from the physical delivery of assets.

What does the right without obligation really mean?

Imagine that you want to buy a car, but you are not sure yet. You agree with the dealer that he will reserve the car for you at a certain price for a month. You pay a small fee for this right. In a week, you learn more about the car and the market. If the price has increased – you can buy it at the previous price. If the price has decreased – you simply forget about the deal, losing only the fee.

This is exactly how options trading works. You pay a premium – this is your commission. This payment is the maximum loss you can incur. Everything else depends on how the market moves.

Key Components of an Options Contract

Option type: Buy ( Call ) and Sell ( Put )

Call option allows you to buy an asset at a fixed price. If you are confident that the price will rise, you buy a call. If the price indeed rises, you make a profit. But most of the time the option is not exercised – instead, it is sold to another trader who pays more due to the increase in value.

Put option allows you to sell an asset at a fixed price. It is your insurance policy if you are afraid that the price will drop. When the market declines, the value of the put increases, and you can make a profit by simply selling the contract.

Four critical parameters

Expiration Date is the deadline when the contract ceases to exist. After this date, the option can no longer be traded or exercised. The term can range from a few days to several years.

Strike price is the fixed price at which you will have the right to buy or sell an asset. This price does not change during the life of the contract, regardless of how the actual market price moves.

Premium is what you pay for the right itself. It is not the exchange's commission; it is the cost of the option contract. The premium changes daily depending on market activity, volatility, and time to expiration.

Contract size determines how much of the asset you are trading. For stocks, this is often 100 shares, while for cryptocurrencies and indices, the size may vary.

Base Assets: What Can Be Traded

Options can be written on practically anything:

• Cryptocurrencies: bitcoin (BTC), ether (ETH), BNB, Tether (USDT) and others
• Stocks: stocks of companies like Apple, Microsoft, and Amazon
• Indexes: S&P 500, Nasdaq 100 and similar
• Goods: gold, oil, agricultural products

The choice of asset depends on your trading strategy and the platform you choose.

Where Most Traders Fail

The primary mistake is to think that an option must be held until expiration. In reality, an option is an independent trading instrument. Its value changes constantly. You can buy an option in the morning and sell it by noon for a profit, without even considering the underlying asset. This is exactly what most professional options traders do – they trade contracts, not assets.

Greek Letters: How to Measure Risk

In the world of options trading, there are five key risk indicators:

Delta (Δ) indicates how much the price of the option changes if the underlying asset changes by $1. This is the most important metric for understanding the sensitivity of the contract.

Gamma (Γ) measures the rate of change of delta. This helps to predict how your position will change with further market movements.

Theta (θ) – is time decay. Each day that approaches expiration, the option loses value (if it is not deep in the money). This works in favor of option sellers.

Vega (ν) indicates sensitivity to volatility. The higher the volatility, the more expensive the options. This is taken into account when assessing the premium.

Pro (ρ) measures the impact of interest rate changes. Usually, this is the least important indicator for short-term traders.

American and European Options: What is the Difference?

This question often leaves traders confused.

American options can be exercised at any time before the expiration date. This provides more flexibility, but such options are usually more expensive.

European options can only be exercised on the expiration date itself. They are cheaper but less flexible.

On most cryptocurrency platforms, including popular trading venues, you will find European-style options. It is important to check this before trading as it affects the settlement and execution timing.

Profit and Loss Terminology

In money (ITM) – when the option is profitable at expiration. For a call option, this is when the market price is above the strike price. For a put – when it is below.

At money (ATM) – when the strike price equals the market price. This is the middle.

Without money (OTM) – when the option is unprofitable at execution. For a call option, this is when the market price is below the strike price.

These terms are critically important as they define not only the potential for profit but also the very value of the options contract in the market.

Conclusions and Prospects

Options trading gives you a tool for more flexible engagement with financial markets. Unlike directly purchasing an asset, you gain the right to choose. Your maximum loss is the premium you paid. The profit potential is much greater.

But that does not mean that options are easy. Before you start trading, you must have a deep understanding of all these concepts. Greek letters, expiration dates, strike prices – all of these affect your outcome.

Start small, study real examples, practice on demo accounts. Only then move on to real money.

Important: Prices of digital assets and financial instruments are extremely volatile. The value of your investments can rise or fall. You are fully responsible for your decisions. This material is for educational purposes only and not a recommendation to act. Before you start trading, be sure to consult with professional financial advisors.