Options - Beginner
A derivative is a financial instrument that derives its value from an underlying asset. Derivatives can be used for hedging, speculation, or leverage.
Options are derivative contracts that allow an investor to buy or sell an options contract at a predetermined strike price by a certain expiration date. Depending on the type of expiration, this could be executed before or at the designated date set by the contract.
The two most common expiration styles for options are:
American 🇺🇸: the option can be exercised any time before or by the expiration date.
European 🇪🇺: the option can only be exercised by the expiration date.
The basic options contracts you can obtain are a call and put contract:
Call: A call option gives the owner the right to buy an underlying asset (BTC, ETH, AVAX) at a predetermined strike price and date.
Put: A put option gives the owner the right to sell an underlying asset at a predetermined strike price and date.
The strike price of an option indicates the price at which you can purchase (for a call) or sell (for a put) the underlying assets before the contract expires.
Expiration dates mark the end of the option contract. When a contract is exercised, the underlying asset is purchased or sold at the strike price. Sometimes options can expire worthless even if they reach their expiry date. It all depends on the type of contract and where the current market and strike price are.
- 1.Hedging: Options provide insurance against unfavorable price movements in the underlying asset.
- 2.Leverage: Options offer exposure to the underlying asset of the options contract without needing to purchase the entire asset, allowing for potentially greater returns.
- 3.Speculation: Traders can bet on the price movement of an asset, whether it will increase or decrease in price.
Options serve as a safeguard against unfavorable price fluctuations in the underlying asset, while also offering exposure to the asset without requiring the purchase of the entire asset. This can result in potentially higher returns due to the leverage. Options enable traders to speculate on the asset's price movement, whether they expect it to rise or fall.