Options basics

What an option is, how calls and puts work, and the vocabulary every strategy page uses.

1. What is an option?

   An option is a contract that gives its buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price (the strike) on a fixed date (the expiry), in exchange for a price paid up front (the premium).

2. Calls and puts

   A call is the right to buy the underlying at the strike and gains when the price rises; a put is the right to sell it at the strike and gains when the price falls; each can be bought (long) or sold (short), which gives the four basic positions every strategy is built from.

3. Strike, expiry and premium

   Every option is defined by its strike (the price its payout is measured from), its expiry (the moment it settles) and its premium (the price paid for it), all for one contract of a fixed size in the underlying.

4. Moneyness: in, at and out of the money

   Moneyness describes where an option's strike sits relative to the underlying's price: in the money if it would pay something were it settled at the current forward price, at the money if the strike is about equal to the price, and out of the money if it would pay nothing.

5. Intrinsic value and time value

   An option's premium splits into intrinsic value, what it would pay if it settled at today's forward, and time value (extrinsic value), the rest, which the market charges for the chance of a further move and which decays to zero by expiry.

6. Payoff, breakeven and max profit/loss

   A strategy's payoff is what it is worth at expiry at each settlement price; subtracting what it cost gives its profit or loss, whose zero crossings are the breakevens and whose highest and lowest points are the maximum profit and maximum loss.

7. Strategy anatomy: legs, width and wings

   A strategy is a set of legs, each one a call, put or underlying position bought or sold in a given ratio at a strike and expiry; its shape is described by the width between strikes, its body and wings, and for calendars a near and a far expiry.

8. How BOSS classifies strategies

   BOSS classifies each of its 58 strategies along six dimensions: proficiency level, market direction, volatility outlook, whether risk is capped, whether reward is capped, and whether it aims for income or capital gain.

9. Bid, ask, slippage and fees

   Every option has a bid (the best price someone will pay) and an ask (the best price someone will sell at); trading at once means buying at the ask and selling at the bid, and that gap from the mid-price, plus the venue's trading fee, is the real cost of entering a trade.

10. Settlement and delivery

    At expiry, crypto options on Deribit, OKX and Bybit settle in cash: each option pays its intrinsic value measured against the venue's official delivery price, and the position disappears from the account, leaving only the cash difference.

11. Margin

    Margin is the collateral a venue requires you to hold against a position that can lose more than it cost, mainly sold options: initial margin to open it, and maintenance margin to keep it open, below which the position is liquidated.

12. Liquidation

    Liquidation is the venue forcibly closing some or all of a margined position, for a fee, once the account's equity no longer covers the position's maintenance margin.

13. Managing positions: closing, rolling and adjusting

    Managing an options position means deciding, before expiry, whether to close it, roll it to another expiry or strike, or adjust one of its legs, weighing what is left to gain against the risk still carried and the cost of trading out.