Options trading is a derivative investment method that gives the buyer the right to buy or sell the underlying asset at an agreed price in the future. This article interprets options trading from the dimensions of basic concepts, contract types, pricing models, strategy applications, risk management, and practical operation on Gate, helping readers to quickly understand options trading and get started on Gate.
1. Basic Concepts of Options
1.1 What is Options?
- Definition Options are derivative contracts. The buyer pays a premium and can buy (call options) or sell (put options) the underlying asset in the future at the exercise price, but is not obligated to exercise.
- Option Premium The buyer pays a fee to the seller to obtain this right, similar to an insurance premium.
1.2 Option Elements
- Underlying Asset Stocks, indices, commodities, or encrypted assets, etc.
- Strike Price Agreed buying and selling price.
- Expiration date (Expiration) Expiration Date: Refers to the last trading day specified in the options contract. On the expiration date, the option buyer can choose to exercise the right or abandon the exercise. If the option is not exercised on the expiration date, the option will automatically expire.
2. Main Types of Options
| Type | Features | Use Case |
|---|---|---|
| American Options | Any trading day before expiration date can be exercised | Flexible exercise demand, capturing early volatility |
| European Options | Exercise only on the expiration date | Simplified pricing models, commonly seen in index options |
| Options Combination (Spread) | Buying and selling multiple options at the same time constitutes a combination, such as bull market spreads, butterfly spreads, etc. | Lowering costs or constructing specific return/risk curves |
3. Core Model of Options Pricing
3.1 Black - Scholes - Merton model
- Assuming continuous risk-free interest rates and underlying price following geometric Brownian motion, the theoretical pricing formula can be obtained.
- Main inputs: underlying price, strike price, volatility, risk-free interest rate, time to maturity.
3.2 Core Concepts of Options Pricing
- The expected volatility reflected by the market option price, which is inferred from the market’s estimation of future fluctuations.
- Commonly used as a sentiment indicator, high implied volatility means the market expects large fluctuations.
4. Common trading strategies
4.1 Single Leg Strategy
- Buy bullish (Long Call) Bullish underlying assets, limited risk, unlimited returns.
- Sell Bullish (Short Call) Bearish or neutral, limited profit, unlimited risk.
4.2 Price Spread Strategy
- Bull Spread Buy low strike price Call, sell high strike price Call, limited profit and low cost.
- Bear Market Spread (Bear Spread) Buy a put option with a higher exercise price, while selling a put option with a lower exercise price to construct a bear market spread strategy.
4.3 Structured Combinations
- Butterfly Spread Three-legged combination, constructed for maximum profit at the mid-price, suitable for volatile markets.
- Iron Condor Sell one spread while buying another to construct wide range profits.
5. Precautions
Time Value Decay Options values depreciate rapidly as the expiration date approaches, especially detrimental to the buyer.
Volatility The change in implied volatility has a significant impact on option prices, and strategies need to consider Vega risk.
Liquidity Some options contracts may have low trading volume, which may result in large bid-ask spreads.
Margin Requirements The seller needs to pay a margin to avoid the risk of liquidation.
Portfolio Risk Multi-leg strategies require a comprehensive consideration of the Greeks indicators of each leg.
6, Gate Platform Operation Guide
- Log in to Gate, navigate to the top ‘Contract’ and select ‘Options’
Transfer assets to the options margin account to start trading. You can also click “
Options Trading Practical Guide Learn more about the operation steps details.
Order Placement and Management
- Support market orders, limit orders, and conditional orders.
- You can check the Greeks, margin level, and expiration date of each contract in the ‘Holdings’ interface in real time.
- Built-in strategy templates: bull market spread, bear market spread, butterfly spread, iron condor, one-click deployment.
7. Conclusion
Options trading is widely used in speculation, hedging, and yield enhancement due to its asymmetric risk-return characteristics and rich strategy combinations. By studying the basics of options, pricing models, and strategies, you can quickly master the skills and participate in options trading.
