What are options?
In short
Options are contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a set price within a specific time frame.
Imagine paying an amount to “lock in” the price of a house for a set period, without committing to buy it. If it ends up not being worth it to you, you let the right expire and lose the amount you paid. That is the basic logic behind buying an option.
In crypto options, the asset can be, for example, Bitcoin. A call gives the right to buy, while a put gives the right to sell. The contract sets the strike price, the expiry and when the right may be exercised. The buyer pays a premium to the seller.
In a hypothetical example, you buy a call on one Bitcoin with a strike price of €50,000 and a premium of €2,000. If Bitcoin is at €55,000 at expiry, the option is worth €5,000 and the net result is €3,000, before fees. At €51,000, the option has value, but it doesn’t cover the whole premium. Depending on the contract, settlement takes place by delivering the asset or by paying the difference in value.
Why it matters
Options trading is used both for exposure to market moves and for hedging. Someone who holds Bitcoin can, for example, buy a put to limit the impact of a drop for a set period. But the protection costs money, like an insurance premium.
Unlike buying Bitcoin on the spot market, here you are buying a right with an expiry date. We consider this difference fundamental: you can read the market’s direction correctly and still lose money because the move came too late or was too small.
What to watch out for
An option’s price is affected by the time remaining, the price of the underlying asset and the expected volatility. As expiry approaches, its time value usually declines, all else being equal.
For the buyer of a plain option, the maximum loss is limited to the premium and fees. For the seller, the risk is different: they take on an obligation and can suffer much larger losses. When selling a naked call, the potential loss is theoretically unlimited. Margin requirements, liquidity and settlement rules also need attention.