Options Basics
Everything you need to know to begin trading with Nexo Options.
What are Options?
An option is a financial contract that grants the buyer the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) an underlying asset at a predetermined price on or before a specific date. Traders use on-chain options for speculation or to protect existing positions. Options are called derivatives because their value is derived from the price of an underlying asset.
What is a Call Option?
A call option is a contract that gives the holder the right, but not the obligation, to buy a defined quantity of an underlying asset at a set price within a specified timeframe. The agreed-upon price is known as the strike price.
Example: A call option might give the buyer the right to purchase 1 ETH at $2000 anytime before it expires in 90 days. Multiple expiration dates and strike prices are available for traders to select from.
Potential Profit: Unlimited, as the underlying asset price can keep rising.
Potential Loss: Limited to the premium paid.
Example: Buying a Call Option
The premium is the cost of the call option—the price paid for the rights it provides. If, at expiry, the underlying asset’s price is below the strike price, the call buyer only loses the premium. If the asset’s price rises above the strike, the profit equals the asset’s market price minus the strike price and the premium paid.
For example:
ETH trades at $1000 at expiry
Strike price = $800
Premium paid = $50
Profit = $1000 - ($800 + $50) = $150 If ETH ends below $800, the buyer loses only the $50 premium.
What is a Put Option?
A put option gives the buyer the right, but not the obligation, to sell a certain quantity of an underlying asset at a set strike price within a given period.
Potential Profit: Significant, growing as the asset’s price falls toward zero.
Potential Loss: Limited to the premium paid.
Example: Buying a Put Option
If, at expiry, the underlying asset’s price is higher than the strike price, the put buyer loses the premium paid. If the asset’s price falls below the strike, the profit is the strike price minus the asset’s market price and the premium.
For example:
ETH trades at $1000 at expiry
Strike price = $1200
Premium paid = $50
Profit = $1200 - ($1000 + $50) = $150 If ETH closes above $1200, the buyer loses the $50 premium.
What is a Strike Price?
The strike price is the predetermined level where an option can be exercised.
For call options, it is the price at which the buyer can purchase the asset.
For put options, it is the price at which the buyer can sell the asset.
Example: An ETH call option gives the right (but not the obligation) to buy ETH at the strike price in the future. A put option grants the right to sell ETH at the strike price.
What is an Expiration Date?
The expiration date is the last day an options contract is valid. By this date, the holder must decide to:
Exercise the option,
Close the position to lock in profit or loss, or
Let it expire worthless.
What is an Option Premium?
The option premium is the price of the contract. It represents income for the seller (writer) and the cost for the buyer.
Premiums are made up of:
Intrinsic Value: The amount the option is in-the-money.
Extrinsic Value: The time value and volatility component.
Out-of-the-money options only have extrinsic value.
Factors influencing premiums include:
The underlying asset’s price
Moneyness (how close the price is to the strike)
Time to expiration
Implied volatility
As the underlying price rises, call premiums increase while put premiums decrease. Conversely, as the underlying price falls, put premiums rise while call premiums decline.
The deeper an option moves in-the-money, the more its premium increases. Out-of-the-money options lose intrinsic value, so their premium depends mostly on time and volatility.
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