What an option is
An option is a contract giving its buyer the right, but not the obligation, to trade an asset at a fixed price on a future date. A call is the right to buy; a put is the right to sell. The fixed price is the strike, the date is the expiry, and the price paid for the contract is the premium.
The buyer pays the premium and can never lose more than it. The seller receives the premium and takes on the obligation — and with it, a loss that is not capped by what they received. Every option has both sides, and they are not mirror images in risk: one has a known maximum loss, the other does not.
How crypto options actually settle
Crypto options on the major venues differ from the stock options most explanations describe:
- European exercise. They can only be exercised at expiry, not before. There is no early assignment to manage.
- Cash settled. Nothing changes hands but the difference in value, paid in the quote currency. You never receive or deliver the coin, so a covered call does not remove your coins from your account.
- Fixed expiry times. Contracts settle at a set hour, commonly 08:00 UTC, against an index averaged over a short window rather than a single last price — which makes settlement harder to manipulate.
- Daily, weekly and monthly series exist side by side, and the shortest-dated ones are the least liquid and widest-spread.
Fees work differently too, and in the buyer's favour. Binance charges a percentage of the underlying's notional value per contract, but caps it at 10% of the option's price, plus an exercise fee on contracts that finish in the money. The cap matters: without it, the fee on a cheap out-of-the-money option could exceed the premium itself.
What you are actually trading
An option's price has only two components. Intrinsic value is what it would be worth if it expired right now — often zero. Everything else is time value, and time value is driven mostly by one input: implied volatility, the market's estimate of how much the asset will move before expiry.
Two consequences follow, and they surprise most newcomers:
- You can be right about direction and still lose. If you buy a call and the asset rises slowly while implied volatility falls, the option can be worth less than you paid. You bought volatility as much as direction.
- Time decay is relentless and accelerating. Time value erodes every day and fastest in the final week. A buyer needs the move to happen soon; being eventually right is worth nothing at expiry.
This is why weekly options attract beginners and punish them: they are cheap because they are nearly out of time, and that is a description of the odds, not a discount.
The four basic positions
Everything else is a combination of these four. The risk column is the part to read twice:
| Position | View | Maximum loss | Maximum gain |
|---|---|---|---|
| Long call | Up, soon | Premium paid | Unlimited in principle |
| Long put | Down, soon | Premium paid | Large, capped at a zero price |
| Short call | Not up | Unlimited in principle | Premium received |
| Short put | Not down | Large, down to a zero price | Premium received |
Buying gives a known, capped loss and requires the move to arrive before expiry. Selling gives a high proportion of small wins and an uncapped tail, and requires margin that the exchange can liquidate against you at the worst possible moment.
Why selling premium is not free money
Sooner or later every options newcomer notices that most options expire worthless and concludes that selling them is an income strategy. The win rate is genuinely high — and that is exactly what makes the trade dangerous.
Implied volatility does tend to sit somewhat above the volatility that is subsequently realised; this variance risk premium is documented in equity and index markets and is the real reason selling can pay. But three things stand between that observation and a profitable strategy:
- The premium is compensation for risk, not a gift. Sellers are paid for absorbing losses that arrive suddenly and in size. A single violent week can erase a year of collected premium — crypto produces such weeks regularly.
- Costs and spreads eat a thin edge. The gap between implied and realised volatility is measured in a few percentage points. Fees, bid-ask spread and the cost of hedging consume much of it before it reaches you.
- A high win rate is not an edge. Winning 90% of the time while the losses are ten times the wins is a break-even strategy at best, and the losses cluster precisely when your other crypto holdings are falling too.
If you sell options, defined-risk structures — where a bought option caps the loss on a sold one — are the difference between a bad week and a catastrophic one.
The bottom line
Options are the most flexible instrument available to a retail crypto trader and the least forgiving of vague thinking. They require a view on direction, size and timing simultaneously, where spot requires only the first. That is three ways to be wrong on a single trade.
If you are starting: buy before you sell, so your maximum loss is known and paid up front; use liquid, longer-dated contracts rather than the cheap weeklies; size so that a total loss of the premium is a non-event; and never sell an uncovered option without understanding what the exchange will do to your margin in a fast market.
Sources and further reading
Primary sources are preferred: regulators, central banks, statistical agencies, tax authorities, index providers and original research. Links open on the publisher's own site; FinSage has no commercial relationship with any of them.
- FINRA — Options. Regulator explainer covering calls, puts, premium, assignment and the risks of selling.
- Binance — Options trading fees, the published schedule including the trading-fee cap at 10% of the option price and the exercise fee.
- Carr, P. & Wu, L. — Variance Risk Premiums, Review of Financial Studies. The evidence that implied volatility typically exceeds realised, and what sellers are being paid for.
- Deribit — DVOL, the crypto implied-volatility index, for observing implied volatility on BTC and ETH directly.