Discover the Nature of Options Trading: From Theory to Practice

What Is Options Trading - Basic Definitions

Options trading is the activity of buying and selling options contracts, allowing traders the right (but not the obligation) to buy or sell an asset at a predetermined price. The key difference here is that options trading does not require you to execute the trade — you can choose to decline if it’s not advantageous.

Most traders do not wait until expiration date but instead trade options contracts to profit from price volatility of the contract itself, rather than buying/selling the underlying asset.

Fundamental Concepts in Options Trading

###What Is an Options Contract?

An options contract is a legal agreement that grants you the right to buy or sell an underlying asset at a price called the strike price, on or before a specific date called the expiration date.

To make it easier to understand, imagine you are considering buying a house. Instead of deciding immediately, you sign an options contract with the seller: the right to buy the house at $300,000 within one month. To obtain this right, you pay a fee called the option premium. If the house price rises, you can buy at the original price and make a profit. If the price drops, you only lose the premium — you are not forced to buy.

###Call Option(

Call options give you the right to buy the underlying asset at the strike price. Traders use this tool when they forecast the asset’s price will increase. If the forecast is correct, you can:

• Buy the asset at the strike price and sell it at a higher market price for profit
• Sell the option contract before expiration if its value increases

The higher the increase in the asset’s price, the greater the profit.

)Put Option###

Put options give you the right to sell the underlying asset at the strike price. This is an option when you believe the price will decrease. If the price falls below the strike price, you can sell at a higher price than the current market, or sell the contract if its value increases.

Main Components of an Options Contract

(Expiration Date

This is the contract’s validity period. After this date, the contract becomes invalid and cannot be exercised. The duration can range from a few weeks to several years depending on the type of option.

)Strike Price

The fixed price at which you have the right to buy ###call options### or sell (put options) the asset. This price remains unchanged throughout the contract, regardless of market fluctuations.

(Option Premium

The cost to buy the option — the money you pay for the right to buy/sell without obligation. This fee depends on:

• Current price of the underlying asset
• Expected volatility
• Strike price
• Remaining time until expiration

)Contract Size

A standard stock options contract usually includes 100 shares. For cryptocurrencies, indices, or commodities, the size may vary — always check carefully before trading.

Popular Underlying Assets

In options trading, you can trade options on:

• Cryptocurrencies: Bitcoin ###BTC###, Ether (ETH), BNB, Tether (USDT), and many others
• Stocks: Apple (AAPL), Microsoft (MSFT), Amazon (AMZN)
• Indices: S&P 500, Nasdaq 100
• Commodities: Gold, oil, coffee

Trading Before Expiration Date

Most profits from options trading do not come from exercising the contract at expiration, but from buying and selling the contract beforehand. The contract’s value fluctuates continuously based on market conditions and remaining time. You can buy and sell to profit (or incur losses) without actually trading the physical asset.

Important Profitability Terms

(In The Money)ITM###, At The Money (ATM), Out Of The Money (OTM)

These terms describe the relationship between the strike price and the current market price:

Call options:

• ITM: Market price > Strike price (profitable)
• ATM: Market price = Strike price (breakeven)
• OTM: Market price < Strike price (loss)

Put options:

• ITM: Market price < Strike price (profitable)
• ATM: Market price = Strike price (breakeven)
• OTM: Market price > Strike price (loss)

Greek Symbols (Greeks) - Risk Measurement Tools

To understand how options prices change, traders use 5 main Greek symbols:

Delta (Δ) - Measures how much the option price changes when the underlying asset’s price changes by 1 USD. It helps you understand how “sensitive” the option is to asset fluctuations.

Gamma (Γ) - Measures the rate of change of Delta. Indicates how Delta will fluctuate as the asset price continues to change.

Theta (θ) - Represents time decay. As expiration approaches, how much the option’s value decreases, especially for OTM options.

Vega (ν) - Reflects sensitivity to market volatility. If volatility is expected to be high, option prices tend to increase.

Rho (ρ) - Measures the impact of interest rates. Positive Rho means prices increase with rising interest rates, negative Rho means the opposite.

American vs European Options

The two main types differ in exercise timing:

American options: Can be exercised at any time before expiration, offering greater flexibility.

European options: Can only be exercised on the expiration date.

However, since most options trading involves buying and selling contracts rather than exercising, this difference mainly affects the final settlement mechanism.

Key Points to Remember

Options trading offers flexibility because you are not obligated to buy/sell the asset. You can:

• Profit from price movements of the option
• Manage risks more effectively
• Participate in diverse financial markets

However, to avoid unnecessary losses, it’s essential to understand:

• How call and put options work
• The roles of components (strike price, premium, expiration date)
• How to use Greeks to assess risk
• The impact of time and volatility

These are fundamental principles before starting real options trading.