The basics of options trading: a complete guide to getting started

The essential to know

Options trading represents a form of trading where you can have the right, without being obligated, to buy or sell an asset at a predetermined price before a set deadline. Unlike direct asset trades, most gains come from buying and selling the contracts themselves, rather than from their exercise. American options offer maximum flexibility by allowing exercise at any time before expiration, while European options can only be exercised at the deadline. Mastering the concepts of call options, put options, premiums, expiration dates, and strike prices is essential for trading with certainty.

Understanding Options Trading: Beyond the Obligation

Options trading is distinguished from other forms of investment by a fundamental characteristic: you are never obliged to execute a transaction. This mechanism offers a flexibility that is rarely found elsewhere in financial markets.

To fully grasp this nuance, imagine a real estate negotiation. You spot an interesting property but you are still hesitant. Instead of committing immediately, you negotiate with the seller an agreement granting you the right to purchase at a set price within a defined timeframe. You pay a fee, called a premium, to obtain this right.

If the market moves favorably and the value increases, you can exercise your right. If it decreases, you simply abandon your option, losing only the premium paid. This is exactly how options trading works in financial markets.

Traders buy an option by paying a premium, thus obtaining the right—but not the obligation—to buy or sell an asset before the deadline. Remarkably, many traders resell their contracts to other investors before expiration, making profits on the fluctuations in value of the contract itself, without ever touching the underlying asset.

The essential components of options contracts

Expiration date

The expiration date marks the last day you can exercise your right. After this date, the contract becomes invalid. Contracts vary significantly: some expire in a few weeks, others after several years. This time flexibility allows traders to adjust their strategy according to their investment horizon.

Exercise Price

The exercise price is the predetermined amount at which you can acquire ( for call options ) or sell ( for put options ) the asset. This price remains fixed throughout the duration of the contract, regardless of market movements. This is precisely what creates the attractive asymmetry of options trading: you benefit from favorable movements while your risk is limited to the premium paid.

Prime

The premium is simply the price of the options contract. It represents the cost of obtaining this right, without obligation. Several factors influence this price:

• The current market price for the underlying asset
• The expected volatility of this asset
• The strike price set
• The time remaining until expiration

A high premium generally reflects a greater likelihood that the option will be profitable, while a low premium indicates a less likely opportunity but potentially more profitable.

Contract Size

For traditional stocks, a contract generally covers 100 shares. However, this standard varies significantly depending on the type of options. Contracts on cryptocurrencies, stock indices, or commodities may have different specifications. It is crucial to check the size precisely before trading.

Buy options and sell options: the two pillars

Purchase options

A call option gives you the right to buy an asset at the strike price. You would adopt this strategy if you anticipate a price increase. If your prediction comes true and the market price exceeds the strike price, you can buy at a low price and sell at the current price, thus making a profit.

But here's the key point: you do not need to exercise the option. If the value of the contract increases before expiration, you can simply resell it to another trader to pocket the profit. The majority of options trades work precisely this way.

The put options

A put option gives you the right to sell an asset at a previously agreed strike price. This strategy is relevant when you expect a price decline. If the market does indeed drop, you can sell your asset at the strike price ( higher than the current price ) and potentially buy it back cheaper, pocketing the difference.

As with call options, you can sell the contract itself before its expiration if its value increases, turning your correct prediction into immediate profit.

The assets on which options can be traded

Options trading spans a wide range of financial assets:

• Cryptocurrencies: Bitcoin (BTC), Ether (ETH), BNB, Tether (USDT) and other major altcoins
• Actions : Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and listed companies
• Stock indices: S&P 500, NASDAQ 100, and other benchmark indices
• Commodities: Gold, oil, natural gas, and other resources

This diversity offers traders many opportunities based on their forecasts and risk profile.

Key Terminology of Options Trading

The states of profitability

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

In the course (in-the-money): The option is profitable at its current state. For a call option, the market price exceeds the strike price. For a put option, it is the opposite.

At parity (at the money): The market price is exactly equal to the strike price. The option is neither profitable nor unprofitable at this precise moment.

Out of the money (out-of-the-money): The option is currently not profitable. For a call option, the market price is below the strike price.

These states are crucial as they determine the actual value of the contract and your decision-making strategy.

The Greeks: measuring risk

In advanced options trading, the Greeks are measurement tools used to quantify how different factors affect the price of an option.

Delta (Δ) measures the sensitivity of the option's price to each one dollar change in the underlying asset. A delta of 0.5 means that the option gains $0.50 for every dollar increase in the asset.

Gamma (Γ) measures the rate of change of the delta itself. It is the “derivative of the derivative,” useful for understanding the stability of your hedge.

Theta (θ) captures time decay. As expiration approaches, the value of the option generally decreases, especially if it is out of the money.

Vega (ν) quantifies the sensitivity to market volatility. Increased volatility generally raises option prices as extreme movements become more likely.

Rho (ρ) measures the impact of interest rate changes on the option's price.

Understanding these Greeks allows traders to make more nuanced decisions and actively manage their positions.

American options vs. European options

The distinction between these two types is based on the flexibility of exercise.

American style options

These options offer maximum freedom: you can exercise them at any time before the expiration date. This flexibility comes at a price: American options generally cost more than their European equivalents. They are predominant in North American markets.

European style options

These options are only exercised on the exact day of expiration. Although less flexible, they are often less expensive. They are common in Asian and European markets. For traders who never exercise their options (the majority), this distinction matters less as they sell the contracts before expiration.

Different markets favor different styles according to their regulations and historical conventions. Therefore, it is essential to check the type of options offered before trading.

Conclusion

Options trading offers remarkable flexibility: you gain the right without the obligation. Whether you use call options to take advantage of expected increases or put options to benefit from declines, the mechanism remains the same. The beauty of this approach is that most profits come from the trades of the contracts themselves, without ever holding the underlying asset.

However, this flexibility comes with complexity. The factors influencing options pricing—the market price, volatility, time remaining, the Greeks—create a dynamic ecosystem that requires a solid understanding before committing. Beginners should take the time to master these fundamental concepts, study the Greeks, and practice on paper before risking real capital. This preparation transforms options trading into a potentially lucrative strategy rather than a source of predictable losses.