Options
In simple terms
An option is like a ticket that gives you the choice to buy or sell something at a specific price in the future, but you don't have to use it if you don't want to. It's useful when you want to protect yourself against price changes or bet on what a price will be.
Definition
Contracts granting the right (not obligation) to buy or sell assets at a set price.
In depth
Options are derivative contracts that grant the holder the right, but not the obligation, to buy (call option) or sell (put option) an underlying asset at a predetermined strike price on or before a specified expiration date. The option writer (seller) receives a premium from the buyer for providing this conditional right. In crypto markets, options contracts are typically settled on-chain through smart contracts that verify price feeds from oracles to determine settlement conditions at expiration, enabling transparent and non-custodial derivatives trading.
How does Options work?
A buyer pays a premium to the seller, who is called the writer. The contract fixes four things: the underlying asset, the strike price, the expiration date, and whether it is a call or a put. The buyer receives a right; the seller takes on the matching obligation and must post collateral. Before expiry the contract's own price moves with the underlying, the time remaining, and expected volatility, so it can be sold on to someone else. At expiry, contracts that are worth something settle — on most crypto venues in cash rather than by delivering the coin — and the rest expire worthless.
An example
Illustrative figures only: a trader pays a $150 premium for one call option with a $50,000 strike expiring in a month. At expiry the settlement index prints $52,000, so the contract pays $2,000 and the trader nets $1,850 after the premium. Had it settled at $49,000, the contract would have paid nothing and the entire $150 premium would have been lost.
Figures are illustrative only.
What beginners get wrong
- The premium is not a deposit; it is paid to the seller at the outset and is not returned if the contract expires worthless.
- An option buyer can lose the full premium, while someone selling options without collateral held aside can lose considerably more than they received.
- Quotes are usually given per unit of the underlying, so the real cost is the quoted price multiplied by the contract size.
- Crypto options order books are often thin, meaning the gap between bid and ask can add meaningfully to the cost of entering and exiting.
Related terms
Part of
How do crypto options and derivatives work? — the subject page for options and derivatives, with all 9 of its definitions in one place.
Educational only — not financial advice.