Understanding key Option Elements is essential to determining how and when an option will meet your financial objectives.
There are 5 key elements to an option. The underlying asset, expiration, strike price, option type, and premium.
Let’s look at each element.
Underlying Asset
The asset that the option contract derives its value from. The deliverable for every option is a futures contract. Futures contracts also have an underlying product such as bitcoin, another currency, or some other commodity.
Expiration (Expiry Date)
Each option also has its own expiration or expiry date. After the expiration, the option contract will cease to exist. Coincall offers a variety of expiration dates for options including daily, weekly, monthly, and quarterly options. These shorter-term options offer traders greater precision and flexibility to expand their trading strategies.
European and American Style Options are used to describe two different types of option exercise.
With European-style options, you can exercise only at expiration. With American-style options, you can exercise at any time prior to expiration. Coincall options are European-style and can be exercised only at expiration. While you can not exercise the option early, you can trade it to someone else at any time.
Option Type
The two types of options are call options, and put options.
A call option is the right to “buy” the underlying asset at a predetermined price.
A put option is the right to “sell” the underlying asset at a predetermined price
For a detailed introduction to call or put options, please watch the next video.
Strike Price
This is the agreed price at which an underlying asset can be bought or sold at expiration.
Premium
This is the price the buyer pays to the seller to purchase the option. In other words, it is the premium the buyer pays the seller for the right to trade the asset at a specific price. It will be displayed in the option chain and in the order book for each option.
Let’s look at how you may see an option written:
On the Coincall, you will see option instruments written in the following format:
Underlying Asset – Expiry Date – Strike Price – Option Type
For example, if you see an option written as: BTC-30JUN23-30000-C
This means the underlying asset is bitcoin (BTC), the expiry date is 30th June 2023, the strike price is $30,000, and the option type is a call. The buyer of this call option then, is purchasing the right to buy bitcoin at a price of $30,000 on 30th June 2023.
There you have it.
For more information regarding available options, visit Coincall’s product pages.
Fain