Basic Concepts of Options

Introductions to the Options: the Major Financial Instruments

Options are financial instruments that are derivatives based on the value of underlying assets such as gold, stocks, or cryptocurrencies. Options contract allows the buyers to buy or sell its underlying assets. In due time, contract holders of options can choose not to buy or sell the asset, unlike futures.

Commonly, an options contract consists of two parts: Call options and Put options.

  • Call options offer the holder the right to buy assets at a stated price within a specific timeframe.

  • Put options offer the holder the right to sell assets at a stated price within a specific timeframe.

There will be a specific expiration date in each option contract. The contract holder is given the right to exercise the option before its expiration.

The stated price on an option is also known as the strike price. Call options and put options provide a wide range of strategies for profit, hedging, or speculation.

These are two kinds of options with different payout mechanisms: Binary Options & Vanilla Options.

  • Binary options provide a proposition outcome of "yes or no" on underlying targets. The payouts of call and put are binary: all and nothing.

  • Vanilla options pay investors the difference between the price of the underlying asset when an option expires minus the strike price of the option.