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Crypto Options Trading Explained: Calls, Puts & Expiry

TL;DR. An option is the right, without the obligation, to buy (a call) or sell (a put) the underlying at a set strike price until a set expiry, in exchange for a premium paid up front. Crypto options trading is the instrument for two jobs a perpetual cannot do: insuring a position against a move, and trading the size of expected moves rather than their direction. It is the wrong instrument for scalping direction, because an option's price moves with time and implied volatility as well as with the underlying, and a buyer who calls the direction correctly can still lose. The options track covers the subject in thirteen lessons; this one is the door.

Prerequisites for this lesson: Crypto futures (a contract that obliges, against one that gives a right). Lesson 3 of the instruments section.

Rights, not obligations​

A futures contract obliges both sides to trade at the agreed price. An option obliges only the seller. The buyer pays a premium and receives a right: a call is the right to buy at the strike, a put the right to sell, until the expiry. If the right is worth using, the buyer uses it or sells the option on; if not, the option expires and the premium is the loss.

Buy a call on BTC struck at $100,000 for a premium of $3,000 while BTC trades at $100,000. If BTC is at $110,000 at expiry the right to buy at $100,000 is worth $10,000, and the trade made $7,000 after the premium. If BTC is at $90,000 the right is worth nothing, and the loss is the $3,000 paid. The buyer's loss is capped at the premium and the gain is not; the seller's position is the mirror.

Two old stories about the same idea​

The idea is older than any exchange. Aristotle tells of Thales of Miletus, who expected a large olive harvest, paid small deposits in winter for the right to hire the olive presses at harvest, and sublet them at a premium when the harvest came in and everyone wanted a press at once. Had the harvest failed, he would have lost the deposits and nothing more. That is a call option, bought cheaply when nobody wanted it.

The Dutch tulip market of 1637 supplies the other half. At the top of the mania, buyers held contracts obliging them to buy bulbs at prices that then collapsed. Rather than ruin a large part of the merchant class, the authorities allowed the contracts to be settled for a small fraction of the price, which converted obligations into something like options after the fact. The lesson that survives is about the seller's side: the party that is obliged carries the risk that the other party's right will be used against it.

American and European​

The words name the exercise rule, not the geography. An American option can be exercised at any time before expiry; most US equity options are American. A European option can be exercised only at expiry. The crypto options market, and Deribit in particular, which trades the large majority of crypto options volume, uses European-style options settled in cash: no coins change hands at expiry, the difference between the strike and the settlement price is paid in the settlement currency.

European does not mean trapped. The right cannot be exercised early, and the option itself can be sold on the market at any time to realise a profit or cut a loss, which is how nearly every options position is actually closed. The options for beginners lesson covers the mechanics on Deribit, including the 08:00 UTC expiries.

Why an option is not a scalping instrument​

Its price has three drivers, not one. An option's premium moves with the underlying (delta), with time (theta, always against the buyer) and with implied volatility (vega). A scalper long a call can watch BTC rise 2% and lose money because implied volatility fell at the same time, which happens on every scheduled event; the IV crush lesson works through a trade where the direction is right and the position loses $437. A directional scalp needs an instrument that tracks price one to one, and that is the perpetual.

Liquidity is fragmented. The perpetual's volume sits in one contract; the options market's is spread across dozens of strikes and expiries. Spreads on any single option are wide relative to a scalp's target, and the order flow reading that scalping depends on has no equivalent on a strike.

Time works against the buyer. Theta is a cost paid every hour a long option is held, and it accelerates into expiry. The Greeks lesson gives the numbers.

What options are for​

Insurance. A put bought against a long position caps the loss below the strike for the cost of the premium. It is the only instrument that does that without a stop, and stops do not survive a gap. The hedging lesson prices the protection and its alternatives.

Trading volatility. Options are priced from an expected size of movement, the implied volatility. A trader who thinks the market will move more than that buys options; one who thinks it will move less sells them, with a delta hedge to remove the direction. That is a bet on the size of the move, which no other instrument expresses, and the volatility trading and straddle lessons cover it.

Defined-risk structures. Spreads that buy one option and sell another cap both the cost and the outcome; the spreads lesson builds them.

Income, with the honest caveat. Selling options collects premium and works on average because implied volatility usually exceeds the volatility that follows, and the payoff is many small gains and occasional large losses that arrive in crashes. The selling options lesson shows the month that returns a year of premium.

What the options market tells a scalper​

Even a trader who never buys an option reads two things from the options market. DVOL, Deribit's implied-volatility index, converts to the size of daily move the market is paying for, which sets the day's stop distances and expectations. And the open interest by strike, read through max pain and gamma exposure, marks prices where dealer hedging can pin or accelerate the underlying, with the caveats those lessons state.

The traps​

  • Buying calls to scalp a breakout. Direction right, volatility falls, position loses. The IV crush lesson is the arithmetic.
  • Selling premium for "income" without pricing the tail. The selling options lesson is the arithmetic.
  • Treating the strike with the most open interest as a target. Max pain is a description of where premium expires worthless, not a magnet; the max pain lesson says why.
  • Trading options before the Greeks. Every lesson in the options track assumes the previous one; the Greeks lesson is the one that cannot be skipped.

Where to go from here​

This is the last lesson of the instruments section. The options track continues the subject in order; for a scalper, the volatility section is the shorter path to the part that matters day to day.

Related guides:

This article is educational content, not investment advice. Trading derivatives carries substantial risk, including total loss of capital. See disclaimer.

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