Understand About Options: From Basic Concepts to Derivative Trading Strategies

What are Options and rights? If you are exploring derivative trading tools in the crypto and financial markets, this is one of the most important concepts to understand. This article will help you explore in detail from basic definitions to practical trading strategies.

What are Options? Definition and nature of this derivative instrument

In essence, option (Options) are contracts that give the holder the right – but not the obligation – to buy or sell a certain amount of an asset at a specified price on or before the expiration date.

Unlike traditional trading where you buy Bitcoin or Ethereum directly, Options contracts allow you to speculate on price movements without owning the actual asset. This opens opportunities to profit from both bullish and bearish markets.

Real-world example: Suppose Bitcoin is trading at $45,000. You predict the price will rise to $50,000 in the next month. Instead of buying BTC outright (large capital requirement), you can buy an Options contract with a strike price of $48,000 by paying a small fee. If BTC’s price indeed exceeds $48,000, you profit; if not, you only lose the fee.

Notable features of Options

1. Derivative tool with high leverage
Options allow exposure to the underlying asset (underlying asset) without owning it. You can control a large position with relatively small margin – for example, with $1,000, you could open a position equivalent to $100,000 thanks to leverage 1:100.

2. Profit in both rising and falling markets
Unlike spot trading (buy and hold), Options enable traders to profit even when the asset’s price declines. This significantly expands profit opportunities.

3. Pre-defined risk
The maximum loss for an Options buyer equals the premium (Premium) paid. This differs from Futures, where losses can be unlimited.

Main components of an Options contract

To trade Options effectively, you need to understand these factors:

Expiration Date (Expiration Date)
The last day you can exercise your right. After this date, the contract expires worthless. For example: if you open a Bitcoin call Option with an expiration date of 28/2/2025, you only have the right to exercise until that date.

Strike Price (Strike Price)
The fixed price set at the time of contract signing, which remains constant throughout the contract’s validity. It does not change regardless of market price fluctuations.

Type of Option: Call and Put

• Call Options (Call): Grant the right (not obligation) to buy the underlying asset at the strike price. You buy Calls when you expect the price to rise.
• Put Options (Put): Grant the right to sell the underlying asset at the strike price. You buy Puts when you expect the price to fall.

Premium (Premium)
The cost you pay to open the contract. If the contract is not exercised, this fee is non-refundable – representing your maximum loss when buying Options.

Contract Size (Contract Size)
The fixed amount of the underlying asset represented by each contract. For example, an Options contract on Bitcoin might represent 1 BTC or 0.1 BTC depending on the exchange.

Details about Call Options and Put Options

Call Options – When you expect the price to rise

Call Options allow you to buy the asset at a predetermined strike price. The holder has the full discretion to exercise or not.

Profit vs Loss:

• Max loss = Premium (fee paid)
• Unlimited profit (theoretically)

This means: if BTC’s price rises from $45,000 to $60,000 and you bought a Call with a strike of $48,000, you can make significant profit after deducting the premium. But if the price drops below $45,000, you only lose the premium.

Three states of Call Options:

• In the Money (ITM): Strike < market price (potential profit)
• At the Money (ATM): Strike ≈ market price (break-even point)
• Out of the Money (OTM): Strike > market price (no intrinsic value)

Put Options – When you expect the price to fall

Put Options work the opposite: they give the right to sell the asset at a set price. If the market declines, Puts become valuable.

Example: Bitcoin is at $45,000, and you fear it will drop. You buy a Put with a strike of $42,000. If the price drops to $35,000, you can still sell at $42,000 – profit is the difference.

Three states of Put Options:

• In the Money (ITM): Strike > market price (profit)
• At the Money (ATM): Strike ≈ market price
• Out of the Money (OTM): Strike < market price (no profit)

Comparison table: Call vs Put:

Common Options trading strategies

Covered Call – Earning income from held assets

You own some Ethereum and sell a call option on it. This allows you to collect additional premium while still holding ETH. If the price does not exceed the strike, you keep both ETH and premium. If it does, you must sell ETH at the strike price.

Long Put – Protecting your portfolio from decline

You own Bitcoin and buy Put Options as a “hedge.” If BTC’s price drops, Puts offset losses. This is a risk management strategy when you believe in long-term potential but worry about short-term volatility.

Married Put – Combining asset purchase and Put Options

Similar to Long Put but executed simultaneously: you buy the underlying asset and Puts at the same time. This strategy is suitable when you want upside (profit if it rises) but need downside protection (if it falls).

Advantages of Options trading

1. Opportunities to profit in both up and down markets
Unlike spot trading, Options allow you to make money from both directions. Puts when the market declines, Calls when it rises.

2. Clear risk management
The risk for buyers is predetermined = premium. You know your maximum possible loss before entering.

3. Effective leverage
Control large positions with small margin. If your prediction is correct, profits can be impressive.

4. Flexible strategies
Numerous combinations of Calls, Puts, strike prices, expiration dates. You can design trades tailored to specific goals.

Disadvantages and risks to watch out for

1. High complexity
Options are not as straightforward as spot trading. You need to understand concepts, calculations, and strategies. Beginners may make mistakes if they only learn superficially.

2. High transaction costs
Margin requirements for Options are often higher than Futures or spot trading. Transaction fees can also be substantial, especially on full-service broker platforms.

3. Unlimited risk for writers
While Options buyers have limited loss = premium, sellers face potentially unlimited losses. Selling a Call if the price surges can lead to unlimited losses. Selling a Put if the price plummets can force you to buy at a high price.

4. Margin call risk
If your portfolio suffers significant losses and margin is insufficient, the exchange may automatically liquidate your positions to recover debt. This is especially dangerous during volatile markets.

5. Exchange risk
As seen with the FTX collapse in 2022, billions of USD in margin positions were liquidated, causing huge losses for traders. Choosing a reputable, regulated exchange is crucial.

The status of Options trading in Vietnam

In Vietnam, Options trading is not yet fully legalized on the public stock market. However, it follows Decree 158/2020/NĐ-CP on derivatives. Currently, the only derivative product on the Vietnamese stock market is Futures VN30.

According to HNX statistics until 2022, the number of derivative trading accounts exceeded 1.15 million. Futures VN30 trading volume increased from 10,954 contracts/session (2017) to nearly 250,000 contracts/session (2022), indicating growing demand. In the future, Vietnam is expected to expand other derivative products including stock options.

Currently, Vietnamese investors wishing to trade Options must use international platforms supporting these derivatives. Several popular platforms offer this service in Vietnam.

When choosing a platform for Options trading, check:

• Regulated by international financial authorities (ASIC, CySEC, FSC, etc.)
• Provides analysis tools and risk management
• Quality customer support
• User-friendly interface, web/mobile support
• Flexible leverage ratios

Tips for beginners in Options trading

Options trading offers great profit potential but requires discipline and knowledge. If you plan to start:

1. Study thoroughly first
Don’t rush into real money trading. Fully understand all concepts, break-even calculations, and the impact of time (time decay) on Options.

2. Start small
When ready, open small positions with funds you can afford to lose. Gradually increase size as you gain experience.

3. Focus on one asset
Especially at the beginning, trade Options on one or two assets you understand well (Bitcoin, Ethereum, for example). Expand gradually.

4. Design clear strategies
Set profit targets, stop-loss levels, and worst-case scenarios. Stick to your plan strictly, avoid emotional trading.

5. Manage risks
Never trade with money you cannot afford to lose. Use stop-loss, margin limits, and diversify strategies.

Conclusion

What are Options? In summary, they are derivative contracts that grant the right (not obligation) to buy or sell the underlying asset at a specified price at a certain time. They open opportunities to profit in both rising and falling markets but come with significant complexity and risks.

Despite many advantages, Options trading is not suitable for everyone. It requires time to learn, practical experience, and readiness to face initial mistakes. But if you are patient, continuously learn, and follow disciplined trading, Options can become a powerful tool in your investment skillset.

Start with solid knowledge, practice on demo accounts, then gradually move to real funds. Success in Options trading is not luck but the result of thorough preparation and unwavering discipline.