Options Basics

What you need to know before doing anything

What are Options?

An option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call option contract) or sell (in the case of a put option contract) the underlying asset at a specific price on or before a certain date. Traders can use on-chain options for speculation or to hedge their positions. Options are known as derivatives because they derive their value from an underlying asset.

What is a Call Option?

A call option is option contract giving the owner the right, but not the obligation, to buy a specified amount of an underlying asset at a specified price within a certain time. The pre-determined price the call option buyer can buy at is called the strike price. For example, a single call option contract may give a holder the right to buy 1 ETH at $2000 up until the expiry date in 90 days. There are many expiration dates and strike prices for traders to choose from.

• Potential Profit: Unlimited as the level of the underlying asset increases

• Potential Loss: Limited to premium paid for a call option contract

Example: Buying a Call Option

The price of a call option is called the premium. It is the price paid for the rights that the call option provides. If at expiry the underlying asset is below the strike price, the call buyer loses the premium paid. This is the maximum loss. If the underlying's price is above the strike price at expiry, the profit is the current asset price minus the strike price and the premium.

For example, if ETH is trading at $1000 at expiry, the strike price is $800, and the option costs the buyer $50, the profit is $1000 - ($800 + $50) = $150. If at expiry ETH is below $800, then the option buyer loses $50 for each contract they bought.

What is a Put Option?

A put is an option contract giving the owner the right, but not the obligation, to sell a specified amount of an underlying asset at a specified price within a certain time. The pre-determined price the put option buyer can sell at is called the strike price.

• Potential Profit: Substantial and increases as the level of the underlying asset decreases to zero

• Potential Loss: Limited to premium paid for a put option contract

Example: Buying a Put Option

The price of a put option is called the premium. It is the price paid for the rights that the put option provides. If at expiry the underlying asset is above the strike price, the put buyer loses the premium paid. This is the maximum loss. If the underlying's price is below the strike price at expiry, the profit is the strike price minus the current asset price and the premium.

For example, if ETH is trading at $1000 at expiry, the strike price is $1200, and the option costs the buyer $50, the profit is $1200 - ($1000 + $50) = $150. If at expiry ETH is above $1200, then the option buyer loses $50 for each contract they bought.

What is a Strike Price?

A strike price is the set price at which an option contract can be bought (call option) or sold (put option) when it is exercised. For call options, the strike price is where the asset can be bought by the option holder; for put options, the strike price is the price at which the asset can be sold. The strike price is a key variable of call and put options. For example, the buyer of an ETH call option would have the right, but not the obligation, to buy that ETH in the future at the strike price. Similarly, the buyer of an ETH put option would have the right, but not the obligation, to sell that ETH in the future at the strike price.

What is an Expiration Date?

An expiration date in options is the last day that options contracts are valid. On or before this day, options contracts holders will have already decided what to do with their expiring position. Before an option expires, its owners can choose to exercise the option, close the position to realize their profit or loss, or let the contract expire worthless.

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