An option is a contract that can be purchased which gives the holder the right to buy or sell an asset (BTC or stocks) at an agreed upon price on or before a particular date.
You can also be the one to sell the “options contract” where you would be the one selling this right to someone and collecting a premium for it.
Options are a category of the larger derivatives segment of investments. Derivatives are a group of investments that derive their value from an underlying asset, for instance that asset could be Bitcoin, Ethereum, other cryptocurrency, or stocks.
Options contracts are securities sold from one investor to another that represent an agreement between the two parties.
The buyer of the option pays a premium to the option writer or the person selling the options contract.
In exchange for this payment the buyer is given the right aka “the option” to buy or sell a specified investment (like Bitcoin) to the other party at a predetermined price at some point in the future.
To clarify, the option writer (the one selling the options contract) promises to the buyer of the option that as long as “the option” is valid they will sell or buy the underlying asset at the agreed upon price no matter the current value of the asset at the date of expiration.
This most likely was very confusing if you are new to options but hang in there.
Before we get in depth on options trading strategies and technical details. Let's go over briefly the definition of an option one more time. As well as explain some of the other terms or jargon you will need to understand.
An "option" is a contract that give the owner the right but not the obligation to buy or sell an underlying asset at an agreed price, on or before a particular date. This underlying asset the option derives its value from could be BTC, ETH, stocks, Etc.
The strike price is the “agreed upon price” at which the crypto (BTC, ETH, etc.) will be bought or sold.
The expiration date is the “particular date’ at which the option contract will expire.
So in options contracts you either have "the right to buy" or "the right to sell" the underlying asset (BTC, ETH, Stocks, Etc.). There are different names for this for when you have the right to buy versus when you have the right to sell the underlying asset.
If you want the right to buy BTC in the future, you want to buy a call option. Call options gives the option holder the right (but not the obligation) to buy an asset at an agreed upon price on or before a particular date.
While if you want the right to sell Bitcoin, it is called a put 0ption.
Put options give the option holder the right (but not the obligation) to sell crypto (BTC, ETH, etc.) at an agreed upon price on or before a particular date.
CALL OPTION = RIGHT TO BUY
PUT OPTION = RIGHT TO SELL
Remember the reason for it being called an “option” is because you have the option to sell or buy but are not obligated to do so.
For a video explainer on what options are, check out our YouTube video for more details ➡️ Watch YouTube Video
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