What are crypto options?
- Author
- CRYPTO PORT Editorial
- Published
- Updated
- Reading time
- 6 min
In short
An option is the right — not the obligation — to buy (a call) or sell (a put) at a set price. A buyer's loss is capped at the premium paid, while a seller's exposure is theoretically unlimited. Value depends not only on price but on time remaining and expected volatility.
Key points
- A call is the right to buy, a put the right to sell
- A buyer can lose no more than the premium
- A seller posts margin and faces open-ended loss
- Time to expiry and implied volatility drive the price
Definition
A contract conveying the right to buy or sell an underlying asset at a fixed strike price by a fixed date, purchased by paying a premium.
Each contract fixes a strike price and an expiry date, and the buyer pays a premium to hold the right. If exercising is worthless at expiry, the buyer simply walks away and loses only the premium. That asymmetry is the defining feature of an option.
The seller takes the premium and, in exchange, must perform if the buyer exercises. A sold call has to be honoured no matter how high the price goes, so the loss has no theoretical ceiling. Sellers therefore post margin, and a shortfall can trigger a forced close.
An option's price is not set by the underlying alone. More time to expiry, or a higher expectation of future movement, makes the premium larger. As expiry approaches, that time value decays, so a buyer's position erodes when the price sits still.
Watch out for
- · Selling options carries unlimited downside; losses can exceed the margin and wipe out the account
- · Time decay erodes a buyer's position even when the underlying does not move
- · Few venues list them, and thin books can make it impossible to close at the price you want