What is an option?

Two everyday analogies

A call works like the down payment you put on a house or a car you may buy later. You pay a little now to lock in the agreed price. If the price rises, you go ahead at the agreed price and gain the difference. If it doesn't, you walk away and lose only the down payment.

A put works like insurance. You pay a premium so that, if the price falls below a set level (the strike), you are paid the difference. If nothing happens, you lose the premium, like an insurance policy you never claimed.

Both analogies have limits: the "insurer" is not a company but whoever sold the option in the market, the premium is never deducted from the price the way a down payment usually is, and nothing is delivered at the end, since these options settle in cash.

Right versus obligation

Every option has two sides. The buyer pays the premium and gets a right: to buy the underlying at the strike (a call) or to sell it at the strike (a put). The buyer uses that right only if it pays off; otherwise they simply let it expire. The seller receives the premium and takes on the matching obligation: whatever the buyer's right is worth at expiry, the seller pays it.

That asymmetry is the whole point of options. The buyer's loss is capped at the premium; the seller's gain is capped at the premium. What changes hands is risk, priced by the market.

The underlying

The underlying is whatever the option is written on. On the venues BOSS follows (Deribit, OKX and Bybit) it is a cryptocurrency index, such as BTC or ETH against the US dollar. Most textbooks were written for options on stocks, and a few of their ideas don't carry over:

• Cash settlement. Nobody delivers or receives bitcoin at expiry. The option settles in cash for the difference between the strike and the settlement price (the venue's average of its index over the last minutes before expiry).
• European exercise. These options can only be exercised at expiry, never earlier, so there is no early assignment. Before expiry, a seller's risk shows up as a mark-to-market loss and, if it grows, a margin call.
• No dividends. A coin pays no dividend. The forward price of the underlying, which options are priced against, differs from spot only by the market's carry (the basis).

A worked example

Say BTC trades at $100,000. You buy a call with a $105,000 strike, expiring in 14 days, for a premium of $2,000.

• If BTC settles at $115,000, the call is worth $115,000 − $105,000 = $10,000. Your profit is $10,000 − $2,000 = $8,000.
• If BTC settles at $105,000 or below, the call expires worthless. Your loss is the $2,000 premium, and never more.
• Your breakeven is $105,000 + $2,000 = $107,000: the settlement price at which the payout exactly repays the premium.

Leverage

Options give leverage: a small premium controls the exposure of a whole unit of the underlying. Compare the two ways to bet on that rise to $115,000:

• Buying 1 BTC for $100,000 makes $15,000, a 15% return. If BTC ends at $100,000, you lose nothing.
• Buying the call for $2,000 makes $8,000, a 400% return. If BTC ends at $100,000, you lose 100% of what you paid.

Leverage cuts both ways. The call wins far more per dollar when the move happens, and loses everything it cost when the move is too small, too late, or in the wrong direction. Time matters as much as direction, because every option has an expiry.

Why the premium is what it is

The premium is the market's price for that right. It depends on how far the strike is from the current price (see moneyness), how long until expiry, and how much the market expects the underlying to move, its implied volatility. How the premium reacts to each of these is measured by the Greeks, starting with delta.