What Is (Option) Trading? A-Z Guide for Crypto Investors

What Is an Option – Basic Concepts You Cannot Ignore

Option (Option) is a derivative contract that gives you the right – not the obligation – to buy or sell a specific asset at a predetermined price (called the strike price) on or before a certain date. In other words, what is an option essentially acts as a “hedge” for your investment portfolio.

Unlike directly purchasing cryptocurrencies like Bitcoin or Ethereum, when trading options, you do not own the actual asset. Instead, you only pay a fee called the premium to have the right to execute the trade at a future date.

Real-world example: Bitcoin is currently priced at $28,000. You buy a (call option) with a strike price of $30,000, expecting the price to rise. If at expiration, BTC’s price has increased to $35,000, you can buy at $30,000 and profit from the difference. But if the price drops to $25,000, you simply do not exercise the right, losing only the initial premium.

Differentiating Options from Futures – Key Differences

Many people confuse options with futures, but they have fundamental differences:

• Futures: You have an obligation to buy/sell the asset at the contract price upon expiration
• Option: You have only the right to choose whether to execute or not

This makes options safer for buyers, as your risk is limited to the premium paid. Futures, on the other hand, carry unlimited risk.

Option Contract Structure – Components You Need to Understand

Each options contract includes the following components:

1. Strike Price (Exercise Price)
The fixed price at which you will buy or sell the asset if you decide to exercise the contract. This price remains fixed throughout the contract’s validity.

2. Expiration Date (Expiration Date)
The last date you can decide to exercise your right. After this date, the contract expires if not exercised.

3. Premium (Insurance Fee)
The amount you pay to purchase the option. This is a fixed cost that you will lose if you choose not to exercise the contract.

4. Contract Size (Contract Volume)
The amount of the underlying asset that the contract represents. For example, one Bitcoin option contract might represent 1 BTC.

Call Option vs Put Option – The Two Main Types of Options

Call Option – Right to Buy

Call options give you the right to buy the asset at the predetermined strike price. You buy a call when you expect the price to increase.

Features:

• Buyer: Maximum loss = premium paid, unlimited profit potential
• Seller: Maximum profit = premium received, unlimited loss potential

Call Option States:

• In The Money (ITM): Strike price < current market price
• At The Money (ATM): Strike price ≈ current market price (plus premium difference)
• Out of The Money (OTM): Strike price > current market price

Put Option – Right to Sell

Put options give you the right to sell the asset at the predetermined strike price. You buy a put when you expect the price to decrease.

Features:

• Buyer: Maximum loss = premium paid, unlimited profit potential
• Seller: Maximum profit = premium received, unlimited loss potential

Example: If Bitcoin’s price drops to $20,000 but you hold a put option with a strike of $27,800, you can still sell at $27,800.

Put Option States:

• In The Money (ITM): Strike price > current market price
• At The Money (ATM): Strike price ≈ current market price
• Out of The Money (OTM): Strike price < current market price

Three Major Advantages of Trading Options

1. Profit in a Downtrend
Unlike directly buying crypto, with options you can profit when the market declines by purchasing put options.

2. Protect Your Investment Portfolio
Options act as a “shield” for your portfolio. If you hold Bitcoin but worry about a correction, you can buy put options to safeguard your gains.

3. Effective Leverage
With a small capital, you can control a large position. For example, with $1,000, you can open an options position equivalent to $100,000 thanks to leverage.

Four Disadvantages You Should Know

1. High Complexity
Options are not for beginners. There are many technical concepts, formulas, and strategies that require thorough understanding.

2. Expensive Trading Costs
Margin fees, premiums, and other costs can add up, especially if trading frequently.

3. Unlimited Risk for Sellers
If you are an options writer, you face potentially unlimited losses if the market moves strongly against you.

4. Risk of Account Liquidation
If you lack sufficient margin, the exchange can issue a margin call and close all your positions. The collapse of FTX a few years ago is a prime example, where many positions were liquidated and investors lost all their funds.

Basic Options Trading Strategies

( Covered Call – Generate Income from Held Assets

You own Bitcoin and simultaneously sell a call option on it. This helps generate additional income from the premium while limiting risk.

) Long Put – Bet on Price Decline

You buy a put option expecting the price to fall. If your prediction is correct, profits can multiply. If wrong, you only lose the premium.

Married Put – Complete Insurance

You hold Bitcoin and buy a put option as a form of insurance. If the price drops, the put offsets the loss; if the price rises, you still benefit.

Are Options Legal in Vietnam?

In Vietnam, options trading is not yet clearly regulated. Options are only traded OTC ###Over-The-Counter### and mainly for large institutions. The Vietnamese derivatives market currently only offers futures contracts on the VN30 index.

As of 2022, the number of derivatives trading accounts exceeded 1.15 million. The trading volume of VN30 futures increased from 10,954 contracts per session in 2017 to nearly 250,000 contracts per session. This indicates the potential for growth in Vietnam’s derivatives market in the future.

Where to Trade Options – Important Considerations

Since the domestic market does not fully support options, Vietnamese investors must turn to international forex platforms. When choosing a platform, check:

• Licensed by an international financial authority
• Provides risk management tools
• Good customer support
• User-friendly interface on Web and Mobile
• Flexible leverage

Advice for Beginners

Before starting options trading, you should:

1. Learn thoroughly – Don’t rush into action, understand each concept before practicing
2. Start small – Use demo accounts or trade with small amounts initially
3. Choose one asset – Focus on a cryptocurrency you know well
4. Have a strategy – Define your goals, acceptable risks, and stick to your plan
5. Manage risks – Always set stop-loss orders to protect your capital

Options are powerful tools but can be dangerous if not well understood. Knowledge and discipline are key to success in options trading.