Module 8: Crypto Options
What Options Are
Chapter 1 of 14 · about 5 minutes
1.1 Insurance you can trade
Node's house had insurance. Every year, Node paid a premium. If the house burned down, the insurer paid out. If it didn't, the premium was gone, and Node was glad it hadn't been needed.
"What if you could buy insurance on your bitcoin?" Hash asked. "Pay a fixed amount now, and if the price falls below a certain level by a certain date, you're protected. If it doesn't fall, you lose only what you paid."
"That exists?" said Node.
"That's an option," said Hash. "And unlike perps, where losses can run until liquidation, an option buyer always knows the maximum they can lose from the very start."
1.2 What an option is
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an asset at a set price, on or before a set date.
That phrase, "right but not obligation," is what separates options from futures and perps (Module 7). A futures buyer must complete the trade. An option buyer may use the option if it's worth using, or simply let it expire.
| Term | Meaning |
|---|---|
| Underlying | The asset the option is based on, such as BTC or ETH |
| Strike price | The price at which the option lets you buy or sell |
| Expiry | The date the option ends |
| Premium | The price paid by the buyer to the seller for the option |
| Exercise | Using the option's right |
| Contract size | How much of the underlying one option covers, often 1 BTC or 1 ETH, or fractions |
1.3 Calls and puts
There are two basic types of options.
A call option gives the right to buy the underlying at the strike price. It gains value when the price rises.
A put option gives the right to sell the underlying at the strike price. It gains value when the price falls.
| Call | Put | |
|---|---|---|
| Right to | Buy at the strike | Sell at the strike |
| Gains when the underlying | Rises above the strike | Falls below the strike |
| Common use | Betting on a rise; capped-risk bullish exposure | Protection against falls; betting on a decline |
| Real-world analogy | A deposit that locks in the price of a house you might buy | Insurance on something you own |
1.4 Buyers and sellers
Every option has a buyer and a seller, also called the writer.
| Option buyer | Option seller (writer) | |
|---|---|---|
| Pays or receives | Pays the premium | Receives the premium |
| Has | The right | The obligation, if the buyer exercises |
| Maximum loss | The premium paid | Can be very large, unlimited for some positions |
| Maximum gain | Large; unlimited for calls | The premium received |
Think again about insurance. The policyholder pays a small, known premium for protection against a large loss. The insurance company collects premiums from many people and pays out when disasters happen. If disasters are rare and premiums are priced well, the insurer profits. If a disaster is larger than expected, the insurer can lose heavily.
Option buyers are like policyholders. Option sellers are like insurers.
"So buyers have limited risk and sellers have limited reward," said Mint.
"In a sentence, yes," said Hash. "And that asymmetry shapes everything about options."
1.5 A first example
BTC is trading at $100,000. Mint buys a call option with a $110,000 strike, expiring in 30 days, for a premium of $2,765.
| Price at expiry | Is the call worth exercising? | Value at expiry | Mint's result |
|---|---|---|---|
| $95,000 | No; buying at $110,000 makes no sense | $0 | −$2,765 |
| $110,000 | Break-even on exercise | $0 | −$2,765 |
| $115,000 | Yes | $5,000 | +$2,235 |
| $125,000 | Yes | $15,000 | +$12,235 |
No matter how far BTC falls, Mint can lose only the $2,765 premium. If BTC rises far, Mint's gains grow without a fixed limit. Chapter 2 explores calls in detail.
1.6 European and American options
American options can be exercised at any time before expiry. European options can only be exercised at expiry.
Most crypto options, on the major crypto venues, are European-style and cash-settled: at expiry, the option automatically pays its value, based on a settlement price, with no actual coins changing hands. Even though they can't be exercised early, they can be sold at any time before expiry, at whatever price the market will pay.
1.7 Why options matter in crypto
Defined risk. Buyers know their maximum loss in advance, unlike leveraged perps.
Protection. Holders can insure against crashes without selling (Chapter 11).
Income. Holders can earn premiums by selling options against their holdings (Chapter 12).
Volatility trading. Options let traders bet on how much the price will move, not just its direction (Chapter 13).
Market information. Options prices reveal what the market expects about future volatility and where it sees risk (Chapters 6 and 9).
Crypto options trade on a few specialised crypto exchanges, on regulated exchanges in traditional finance, on options linked to spot crypto ETFs, and on some decentralised protocols. Chapter 10 covers how these markets work.
1.8 The honest warning
Options are more complex than spot or perps. Their prices depend on several factors at once, and they lose value over time. Option buyers frequently lose their premiums. Option sellers can face sudden, large losses. Several countries restrict crypto options for retail users.
This module is educational and isn't trading advice. Worked examples use illustrative prices calculated with a standard pricing model.
1.9 Try it yourself
Find a crypto options chain for BTC on any options venue or data site. An options chain lists all available calls and puts by strike and expiry. Pick the nearest monthly expiry. Find the call and put closest to today's price and note their premiums. Then find a call 10% above today's price and a put 10% below. Which is cheaper, and why might that be?
Key takeaways from this chapter
- An option gives the buyer the right, but not the obligation, to buy or sell at a set strike price by a set date.
- Calls give the right to buy and gain from rises; puts give the right to sell and gain from falls.
- Buyers pay a premium and risk only that premium; sellers receive the premium and take on the obligation.
- Option buyers are like insurance policyholders; option sellers are like insurers.
- Most crypto options on major crypto venues are European-style and cash-settled, but can be sold before expiry.
- Options offer defined risk, protection, income, volatility trading, and market information.
- Options are complex. Learn them thoroughly before trading, and check local rules.