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.
Each option has an expiration date, which is when the option contract expires. When a contract is exercised, the underlying asset is purchased and sold at the strike price of the option. 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.
Many investors also use options to buy insurance to offset risk from unfavorable price movements in the underlying asset.
Options offer exposure to the underlying asset of the options contract without having to purchase the entire asset itself. For instance, you can buy more BTC call options than bitcoin with the same investment. The price of the options contract is called the "premium" or "premia".
Options can be used for speculation. Traders can bet on the price of an asset and whether it will increase or decrease in price.