What people do with an option

So far the result was counted on expiry day. But a bought option can be sold on any day. Its price, the premium, changes every minute.

• It rises when BTC moves your way.
• It rises when the market starts expecting a big move.
• It falls with every day: the less time is left, the cheaper the right.

You bought a 90,000 call for 1,000. A week has passed, three remain until expiry.

• First row: the price has not reached the strike, yet there is already a gain.
• Second row: the price did not change, yet the call got cheaper. That is the cost of time.
• Fourth row: the price is the same, but options got more expensive because the market expects a bigger move.

The seller can also exit early: he buys back the same call and removes his promise. That is how a short is closed, too.

The call prices are computed with the standard option pricing formula. A calm market — 25% volatility, a nervous one — 35%.

A structure is several positions together. The four simplest ones. For each: first what you bought and sold and for how much, then what each part pays at different prices.

1. Call spread: cheaper, but with a ceiling.

• Bought a 90,000 call. Paid 1,000.
• Sold a 95,000 call. Received 400.
• Paid 600 in total — cheaper than a single call for 1,000.

The bought call pays you everything above 90,000. On the sold call you pay — everything above 95,000. Subtract 600 from the sum.

• The spread is cheaper and gives more on a moderate rise.
• Above 95,000 it stops growing: the sold call takes everything above.

2. Straddle: a bet on the size of the move.

• Bought an 86,000 call, at the current price. Paid 2,500.
• Bought a put at the same 86,000 strike. Paid 2,500.
• Paid 5,000 in total.

The call pays everything above 86,000. The put pays everything below 86,000. One of them always expires worthless. From what the other one paid, subtract 5,000.

• Break-even is at 81,000 and at 91,000: the strike minus the premium and the strike plus the premium.
• Direction does not matter. What matters is that the price goes beyond these points in either direction.
• If the price stays put, both options expire worthless, minus 5,000.

3. Spot plus a bought put: insurance.

• You hold 1 BTC bought at 86,000.
• You buy an 80,000 put. Paid 800.

Spot gives the result from 86,000 in either direction. The put pays everything below 80,000. Subtract 800 from the sum.

• The rise is yours, minus the cost of the insurance.
• The loss is at most 6,800 on any fall: below 80,000 the put covers every dollar.

4. Spot plus a sold call: income from a coin that just sits there.

• You hold 1 BTC bought at 86,000.
• You sell a 90,000 call. Received 1,000.

Spot gives the result from 86,000. On the sold call you pay — everything above 90,000. Add 1,000 to the sum. This is the most common call seller: his promise is covered by his own coin.

• Up to 90,000 you are always 1,000 ahead: that is the premium.
• Above 90,000 the gain stops at 5,000. All the growth above you hand to the call buyer.