Take an option apart on one example with one set of numbers: how it differs from spot and futures, and what a call, a put, a strike, expiry and premium are.
An option is the third way to play a price move, besides spot and futures. This lesson shows it on one example with one set of numbers.
The numbers are made up. Fees and funding are not counted.
1One idea, three instruments
BTC is at 86,000. You expect it to rise within a month. There are three ways to make the bet.
Spot. You buy 1 BTC for 86,000. You need the whole amount.
Futures. You open a long on 1 BTC with 10x leverage. You need 8,600 of margin.
Option. You buy a call: the right to buy 1 BTC at 90,000 in a month. You pay 1,000 for it.
What happened over the month
SPOT
Futures 10x
Call
Invested
86,000
8,600
1,000
Price 95,000
+9,000
+9,000
+4,000
Price 88,000
+2,000
+2,000
−1,000
Price 80,000
−6,000
−6,000
−1,000
A dip to 77,000, then 95,000
+9,000
−8,600, liquidation
+4,000
The same numbers as in the “Call” column. The red zone is a loss, the green zone a gain. Below 90,000 the premium, 1,000, is lost. Above it, every thousand of price growth gives a thousand. Break-even is at 91,000.
How the call is calculated. Price 95,000: the right to buy at 90,000 is worth 5,000, minus the 1,000 paid, total +4,000. Price 88,000 or 80,000: nobody needs the right to buy at 90,000, the 1,000 paid is lost.
2What the table shows
Spot. You earn on any rise. The loss grows with the fall. There is no liquidation, but you need the whole amount.
Futures. The same result in dollars on ten times less margin. The price for that is liquidation. On the dip you lose the margin, even if the price later went where you expected.
Call. The loss is never more than 1,000. There is no liquidation, a dip along the way does no harm. The price for that: the price has to pass 91,000 — the 90,000 strike plus the 1,000 paid. A small rise to 88,000 gives a loss.
3Then why options
They give what spot and futures do not have.
The loss is known in advance. You cannot lose more than what you paid for the option. The table above shows it.
Earning on a fall without a short. That is what a put is for — the right to sell at a named price. The table is further down this screen.
Insurance. You hold BTC on spot and buy a put. If the price falls, the put covers the loss. The table is in the lesson “What people do with an option”.
A bet on the size of a move, not its direction. The table is in the same lesson, the “straddle” combination.
4Five words
Now the names. All of them were already in the example.
Call — the right to buy. In the example: the right to buy BTC at 90,000.
Put — the right to sell. It works like insurance.
Strike — the price in the contract. In the example: 90,000.
Expiry — the day the right ends. In the example: in a month.
Premium — the payment for the right. In the example: 1,000.
An example with a put. BTC is at 86,000. Now you expect a fall within a month. Two ways: a short on futures with 10x leverage, or a put with an 80,000 strike for 800.
What happened over the month
Futures short 10x
Put at 80,000
Invested
8,600
800
Price 70,000
+16,000
+9,200
Price 78,000
+8,000
+1,200
Price 85,000
+1,000
−800
Price 95,000
−8,600, liquidation
−800
A spike to 95,000, then 70,000
−8,600, liquidation
+9,200
The same numbers as in the “Put at 80,000” column. The picture is mirrored: the gain is on the left, on a fall. Above 80,000 the premium, 800, is lost. Break-even is at 79,200.
How the put is calculated. Price 70,000: the right to sell at 80,000 is worth 10,000, minus the 800 premium, total +9,200. Price 85,000 or 95,000: nobody needs the right to sell at 80,000, the 800 premium is lost.
The short earns on any fall, but a spike up liquidates it.
The put loses no more than 800 and survives the spike. The price for that: the price has to fall below 79,200 — the 80,000 strike minus the 800 premium.
On Binance and Deribit options are cash-settled. Nobody hands over coins: on expiry day the exchange credits the difference in money.
Try it yourself
Take the call from the table: strike 90,000, premium 1,000.
Work out the buyer’s result at a price of 93,000 and at a price of 89,000 on expiry day.
What you should get. 93,000 → +2,000 (the right to buy at 90,000 is worth 3,000, minus the premium). 89,000 → −1,000 (the right is not needed, the premium is lost).
Takeaway
An option is the right to buy or sell a coin at a named price before a deadline. The buyer pays a premium and never loses more than it. A call is the right to buy, a put the right to sell. The buyer cannot be liquidated, but the price has to pass the strike plus the premium.
Quick check
You bought a 90,000 call for 1,000. On expiry day the price is 88,000. The result?
+2,000: the price rose by 2,000
−1,000: the right to buy at 90,000 is not needed, the premium is lost
−2,000: the price fell 2,000 short of the strike
Show answer
Correct answer: −1,000: the right to buy at 90,000 is not needed, the premium is lost
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