Options are contracts giving buyers a specified right, without an obligation to exercise it, in exchange for a premium. Sellers receive that premium and assume the corresponding contractual obligation.
Calls, puts and exercise
A call grants the right to buy the underlying at a strike price; a put grants the right to sell. Cash-settled contracts instead pay the corresponding amount under their settlement formula. American-style options permit exercise before expiry; European-style options permit exercise only at expiry. These labels describe exercise rules, not the trader’s location.
The contract also specifies its size, expiration, settlement currency and exercise procedure. Crypto options do not all share identical terms.
Price and risk
An option’s premium reflects factors including the underlying price, strike, remaining time and implied volatility. A favorable underlying move may therefore still leave a purchased option unprofitable after its premium and costs.
For a standalone fully paid long option, the option loss is limited to the premium, before fees. Selling options creates different risks: uncovered calls can have theoretically unlimited losses, while puts can produce substantial losses. Multi-position strategies change the overall payoff.