What is Option?
Options are financial instruments that are derivatives based on the value of underlying securities such as stocks, commodities, foreign exchange or cryptocurrency. An option contract offers the buyer the right but not the obligation to buy or sell—depending on the type of contract they hold—the underlying asset, while the sellers are obliged to buy or sell if the option expires in-the-money. Unlike futures, the holder is not required to buy or sell the asset if they choose not to. Traders buying option contracts, either call or put options, are called option buyers or option holders, while those who sell them are called option sellers or option writers.
The Key Elements of an Option:
Bit.com currently supports BTC/USD as the underlying asset of its option.
All option contracts listed on Bit.com are European-style options, which mean it has a specified expiry date and the exercise of the option can only be executed at expiry. Bit.com currently offers daily, weekly, monthly as well as quarterly option contracts.
Strike Price ( or often called Exercise Price)
The strike price is the predetermined price of the asset at which it may be bought or sold according to the option contract. Bit.com provides a series of strike prices for you to choose from.
An option premium is the price that an option buyer pay for buying the option contract, and an option seller earns the option premium as a reward for his/her obligation.
The value of the premium is determined by multiple factors, including the underlying asset price, the strike price, time till expiry, and the volatility of the underlying asset, etc.
Call option: It gives the option buyer the right, but not the obligation, to buy a stock, bond, commodity, cryptocurrency, or other asset or instrument at a specified price on the expiry date.
Put option: It gives the option seller(owner) the right, but not the obligation, to sell, or sell short, a specified amount of an underlying asset at a predetermined price on the expiry date.
For instance, BTCUSD-20200927-6000-C refers to a call option contract with BTC/USD being the underlying asset, which expires on 27 September 2020, exercise price at 6000 USD.
The Benefits of Option
- Options can be used as insurance policies to limit losses on a futures contract.
- They can also be used for speculative purposes, whether you are selling options to receive premium income or using options to establish a position in a particular commodity, cryptocurrency, index, or interest rate.
- As hedging instruments, options can produce offsetting gains in the face of adverse price changes in the spot market.
- Options permit you to efficiently deploy capital, in the form of option premium. In this case, you can participate in the price movements of the underlying asset, without having to buy the asset outright.