Options Education




Option Basics & Terminologies
An option is a contract that gives the buyer (holder) the right (not the obligation) to buy or sell

an underlying asset for a predetermined price from the option seller (writer) within a fixed period of time.

Think option like a pizza coupon that gives you the right but not obligation to redeem it with pizza seller prior to the expiration date!
Two types of options are “calls” and “puts”.

Call options give the buyer the right to buy the underlying assets, while put options give the buyer the right to sell the underlying asset.

You can express your bullish opinion on Bitcoin by purchasing XBT/USD call options and express your bearish option by purchasing XBT/USD put options.

The strike price is the price at which the underlying asset is to be bought or sold when the option is exercised.

It's relation to the market value of the underlying asset affects the value of the option and will be a major determinant of the option's premium.

All options expire after a predetermined period of time.

Once the option expires, the right to exercise no longer exists and the option becomes worthless. Just like a pizza coupon -- it becomes worthless after expiration date.

An expiration month is specified for each option contract. The specific date on which expiration occurs depends on the type of option.

For instance, options listed in the United States expire on the third Friday of the expiration month. This same standard is applied at AOEX.

A call option is in the money when the option's strike price is below the market price of the underlying asset.

For a put, the option’s strike price is above the market price of the underlying asset.

Being in the money does not mean you will profit, it just means the option is worth exercising.

A situation where an option's strike price is identical to the price of the underlying security.

Both call and put options will be simultaneously 'at the money.'

For example, if Bitcoin is trading at 200, then the Bitcoin 200 call option is at the money and so is the Bitcoin 200 put option.

An at-the-money option has no intrinsic value, but may still have time value. Options trading activity tends to be high when options are at the money.

A situation where a call option with a strike price that is higher than the market price of the underlying asset,

or a put option with a strike price that is lower than the market price of the underlying asset.

An out of the money option has no intrinsic value, but only possesses extrinsic or time value.

As a result, the value of an out of the money option erodes quickly with time as it gets closer to expiry. If it still out of the money at expiry, the option will expire worthless.

An option contract can be either american style, european style or even asian style.

The manner in which options can be exercised also depends on the style of the option.

American style options can be exercised anytime before expiration, while european style options can only be exercise on expiration date itself.

All of the stock options currently traded in the marketplaces are american-style options.

At Alt-Options, all of our listed options will be american-style options.

The underlying asset is the security which the option seller has the obligation to deliver to or purchase from the option holder in the event the option is exercised.

In the pizza coupon example, pizza is the underlying asset whereas the coupon premium is derived from the underlying asset.

In the case of Bitcoin options, the underlying asset refers to Bitcoin.

Options are also available for other types of securities such as fiat currencies, indices and commodities.

At AOEX, Bitcoin will be the underlying asset, but we will expand to include contracts on other types of cryptocurrencies.

A contract multiplier states the quantity of specific underlying asset that needs to be delivered in the event the option is exercised.

For stock options, each contract typically covers 100 shares.

However, at AOEX, we have a 1:1 multiplier (1 contract = 1 BTC).

Because Bitcoin is divisible (unlike stocks) clients will be able to trade with a minimum lot size of 0.1 contracts.

This means that you can start trading XBT/USD options on AOEX with less than one bitcoin in your account!

Participants in the options market buy and sell call and put options. Those who buy options are called 'holders.'

Sellers of options are called 'writers.'

Option holders are said to have long positions, and writers are said to have short positions.

AOEX has market participants from individual retail investors to institutional market makers and hedge funds.

Call Option
A call option is an option contract in which the holder (buyer) has the right (but not the obligation) to buy a specified quantity of a security at a specified price (strike price) within a fixed period of time.

For the writer (seller) of a call option, the contract represents an obligation to sell the underlying security at the strike price if the option is exercised within a fixed period of time.

The call option writer is paid a premium for taking on the risk associated with the obligation.

For XBT options, each contract covers 1 bitcoin.

A Simplified Example:

Suppose Bitcoin is trading at $250. A call option contract with a strike price of $260 expiring in a month's time is being priced at $5.00.

You strongly believe that Bitcoin will rise sharply in the coming weeks due news or technical breakouts.

So you paid $500 to purchase 100 call option covering 100 bitcoin.

Comparing with longing Bitcoin without leverage, establishing the full position will require you to have $250 * 100 = $25,000 in your account.


A Week Later:

XBT/USD is trading at $290.00 and your $260 call options are selling at $35.00;

your profit owning 100 $260 call options are:


If Holding Options:

Profit: ($35.00 - $5.00) * 100 = $3,000

Return: $3,000/$500 = 600% or 6 X (of your initial investment)


Owning Underlying:

Profit: ($290.00 - $250.00) * 100 = $4,000

Return: $4,000/$(250 * 100) = 16% or 0.16 X (of your initial investment)

Instead of purchasing call options, one can also sell (write) them for a profit.

Call option writers, also known as sellers, sell call options with the hope that they expire worthless so that they can pocket the premiums.

Selling calls, or short call, involves more risk but can also be very profitable when done properly.

One can sell covered calls or naked (uncovered) calls.


Covered Calls

The short call is covered if the call option writer owns the obligated quantity of the underlying security.

The covered call is a popular option strategy that enables the bitcoin owner to generate additional income from their bitcoin holdings through periodic selling of call options.


Naked (Uncovered) Calls

When the option trader write calls without owning the obligated holding of the underlying security, he is shorting the calls naked.

Naked short selling of calls is a highly risky option strategy and is not recommended for the novice trader.

Put Option
A put option is an option contract in which the holder (buyer) has the right (but not the obligation) to sell a specified quantity of a security at a specified price (strike price) within a fixed period of time (until its expiration).

For the writer (seller) of a put option, it represents an obligation to buy the underlying security at the strike price if the option is exercised.

The put option writer is paid a premium for taking on the risk associated with the obligation.

At AOEX, each options contract covers 1 bitcoin.

A Simplified Example:

Suppose Bitcoin is trading at $250. A put option contract with a strike price of $260 expiring in a month's time is being priced at $15.00.

You strongly believe that Bitcoin will fall sharply in the coming weeks due news or technical breakouts.

So you paid $1,500 to purchase 100 put option covering 100 Bitcoin.

Comparing with shorting Bitcoin with margin, to establish and hold the full position you will at least need to have $250 * 100 * 150% = $37,500 in your account.


A Week Later:

XBT/USD is trading at $200.00 and your $260 put options are selling at $65.00;

your profit owning 100 $260 put options are:


If Holding Options:

Profit: ($65.00 - $15.00) * 100 = $5,000

Return: $5,000/$1,500 = 333% or 3.33 X (of your initial investment)


Comparing with owning underlying:

Profit: ($250.00 - $200.00) * 100 = $5,000

Return: $5,000/$37,500 = 13.33% or 0.133 X (of your initial investment)

Utilizing this strategy will allow you to generate the same return using significantly less money.
Investors can also buy put options when they wish to protect an existing long Bitcoin position.

Put options utilized in this manner are also known as “protective puts.”

Put options are protecting the value of the underlying asset because they are locking in a price for which the asset can be sold before the contract’s expiration.

Instead of purchasing put options, one can also sell (write) them for a profit.

Put option writers, also known as sellers, sell put options with the hope that they expire worthless so that they can pocket the premiums.

Selling puts, or put writing, involves more risk but can be profitable if done properly.


Covered Puts

The written put option is covered if the put option writer holds the obligated quantity of the underlying security.

The covered put writing strategy is employed when the investor is bearish on the future price of the underlying asset.


Naked Puts

The short put is naked if the put option writer does not hold the obligated quantity of the underlying security when the put option is sold.

The naked put writing strategy is used when the investor is bullish on the underlying.

For the patient investor who is bullish on Bitcoin for the long haul, writing naked puts can also be a great strategy to acquire Bitcoin at a discount.

Options Premium? What is it?
The 'options premium' is the price paid to acquire the option, also known simply as the 'option price'.

The premium is not to be confused with the option’s strike price. Market price, asset volatility and time remaining till expiration are the primary forces determining the premium.

There are two components to the options premium: intrinsic value and time value.

The intrinsic value is determined by the difference between the current trading price and the strike price.

Only in-the-money options have intrinsic value. Intrinsic value can be computed for in-the-money options by taking the difference between the strike price and the current trading price.

Out-of-the-money options have no intrinsic value.

In the pizza coupon example, the difference between the cost of acquiring the coupon and the pizza price is the intrinsic value.

An option's time value is dependent upon the length of time remaining to exercise the option, the current market value of the option, as well as the volatility of the underlying Bitcoin price.

The time value of an option decreases as its expiration date approaches and becomes worthless after that date.

This phenomenon is known as time decay. For in-the-money options, time value can be calculated by subtracting the intrinsic value from the option price.

Time value decreases as the option goes deeper into the money.

For out-of-the-money options, since there is zero intrinsic value, time value equals the option price.

Typically, higher volatility gives rise to higher time value. In general, time value increases as the uncertainty of the option's value at expiry increases.