The World of Options Trading - A Complete Guide for Beginners

Initial Steps - What You Need to Know

Options are a tool that gives investors the ability, but not the obligation, to trade assets such as cryptocurrencies and stocks at a predetermined price. Their essence is very simple: you pay an amount to acquire the right, while retaining the freedom of decision.

The important thing you need to understand is that most options transactions do not result in the actual possession of the underlying asset. Instead, profits come from the buying and selling of the contracts themselves - the option contract, not the underlying good it relates to.

There are two main categories: American options ( that can be exercised at any time before expiration ) and European options ( that can only be exercised at expiration ). To make informed decisions, you need to know the prices, expiration dates, and strike prices.

What Is the Real Logic Behind Rights?

Buying a call option gives you the right - but not the obligation - to buy or sell something at a specific price until a certain date. Imagine you like a house, but you're not sure if you want to buy it. You can negotiate with the owner to guarantee you a price for a month by paying a small holding fee. If the price of the house goes up, you can buy at the agreed price and profit. If it falls, you simply lose the fee.

Similarly, the investor purchases a call option - a “financial bookmark” - which entitles them to act later. They pay the option price (premium) for this opportunity. The good thing is that, just as you could sell your bookmark to someone else, you can also sell the option contract to another investor before it expires. This allows you to profit from changes in value without being fully committed. Like all financial instruments, there is risk involved, so understanding is critical.

The Structure of the Option Right

What Exactly Are You Buying?

A call option is a contract that gives you the right to buy or sell an asset (referred to as “underlying asset”) at a predetermined price, the strike price, on or before a expiration date.

Using the example of a house: if you negotiated with the seller for an execution price of $300,000 for one month, this price will remain constant regardless of where the market moves. However, the value of the option changes - depending on the current market price, the time remaining, and the market demand. If the market price rises, the option becomes more valuable and you can sell it for a profit.

Call Options - Bets on Reverse Movement

A call option gives you the right to buy the underlying asset at the strike price at expiration or before. The higher the price of the asset rises, the greater your profit. Therefore, you buy a call option when you believe the price will go up. If it does rise, you can buy low and sell high to make a profit. If the value of the call increases before expiration, you can simply sell it at the new higher price and close - you never have to actually buy the underlying asset.

Put Options - Protection in Bear Market

A put option gives you the right to sell the underlying asset at the strike price at expiration or before. You buy a put option when you expect the price to go down. If the price falls below the strike price, you can sell higher and buy lower. The more the price falls, the more profit you make. Like calls, puts can be sold before expiration if their value increases. This is actually how the majority of investors trade - the contract itself, not the underlying asset.

What Assets Can You Trade?

In modern financial markets, you can find options on various underlying assets:

• Cryptocurrencies: Bitcoin (BTC), Ether (ETH), BNB, Tether (USDT) and others
• Stocks: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and thousands of others
• Indices: S&P 500, Nasdaq 100 and other indices
• Commodities: Gold, oil, natural gas, and other commodities

The Life of the Right - Before the Deadline

You do not need to wait until expiration to see results. The option itself is an active trade. The value of the contract constantly changes based on market conditions and the time remaining. This means you can buy an option and sell it a few days or weeks later for a profit or loss, depending on market events. In fact, most profits come from trading the contracts, not from exercising them.

The Ingredients of the Contract

Expiry Date - The Time Limit

The expiration date is the point of no return. After this date, the contract ceases to be valid and cannot be exercised. Options can expire anywhere from weeks to years. Using the house example again, if you purchased an option for one month, you have one month to decide if you want to exercise your option. After the month has passed, the option expires and can no longer be used.

Execution Price - The Price Guarantee

The strike price ( is the predetermined price at which you could buy ) for call options( or sell ) for put options( the underlying asset. If you negotiated with the seller of the house and agreed on $300,000, this is the strike price - regardless of the current market price, you have the right to buy at $300,000 if the option is still active. The relationship between the strike price and the current market price is what determines whether an option has value and how much.

) Option Price - The Cost of the Choice

The option premium ### is what you pay to acquire the option contract. It is the cost of the option without the obligation. Imagine paying $5,000 to the seller of the house for the right to buy at $300,000 for one month. If you do not proceed with the purchase, you lose the $5,000. But if the price jumps to $350,000, your option is suddenly worth something - you can sell that difference.

Some factors that affect the price of the option are:

• The current market price of the underlying asset
• The volatility of the underlying asset's price
• The execution price
• The time remaining until expiration

( Contract Size - How Much Do You Buy?

Typically, an option on stocks covers 100 shares. But for other types of rights - indices or cryptocurrencies - the size can vary significantly. This is why you should always check the details of the contract before purchasing, so you know exactly how much of the underlying asset you are trading.

The Crystals of the Game - Important Terminology

) The Profitability Categories

Terms such as In-the-Money ###ITM###, At-the-Money (ATM), and Out-of-the-Money (OTM) describe the relationship between the strike price and the current market price. These terms are critical because they determine not only whether you will exercise the option but primarily the value of the option contract itself.

For call options:

• ITM: Market price > execution price (low as you were, high buy)
• ATM: The market price = execution price ( at the average )
• OTM: The market price < exercise price ( high as you were, buy low )

For put options:

• ITM: The market price < strike price (high as you were, buy low)
• ATM: The market price = execution price ( at the average )
• OTM: The market price > execution price (low as you were, high buy)

( The Greeks - Risk Measurement Tools

In options trading, the Greeks are mathematical measures that quantify risk and sensitivity. Each Greek represents a different aspect of risk, allowing investors to assess possibilities and make more informed decisions. The five main ones are:

Delta )Δ###: Measures how much the price of the option changes for each $1 change in the underlying asset.

Gamma (Γ): Measures how quickly the delta changes. It is not static - it changes as the underlying asset moves.

Theta (θ): The “time decay” - how much value the option loses as it approaches expiration. This is important for option buyers to understand.

Vega (ν): Measures sensitivity to market volatility. Higher volatility generally means higher option prices.

Rho (ρ): Measures the impact of interest rate changes. A positive rho means that prices increase with interest rates, while a negative rho means they decrease.

American vs. European Rights - The Critical Difference

There are two main categories of options depending on when they can be exercised:

American Options: These can be exercised at any time before expiration, giving the holder great flexibility. You can choose to cash in your profits a little earlier if you feel that the game is changing.

European Options: These can only be exercised on the given expiration date. Limited flexibility, but often cheaper.

This distinction is important because it affects the settlement. However, since the majority of trading involves the buying and selling of the contract itself ( rather than its exercise ), this difference does not significantly impact the way most investors trade.

Many markets offer European options and upon expiration, the options are automatically exercised if they are ITM, providing your result without needing to do anything. Typically, these contracts are settled in cash, meaning money is exchanged for the difference, not the underlying asset. This simplifies things significantly.

Conclusion - Key Points

Options provide investors with flexibility and choice. Instead of being obligated to do something immediately, you can buy the right to act later. And here's the trick: you don't even have to do it. You can simply sell the contract and profit from the changes in the value of the option itself.

This flexibility of profit comes with risk. Therefore, it is essential to understand the basics - expiration dates, strike prices, premium prices, calls, puts, and the Greeks. This knowledge is your compass to navigate the financial markets more safely with confidence and understanding.