Crypto Options: Payoffs, Buyer and Seller Risk, and Expiry Settlement
Summary
The document explains calls and puts as contracts that give buyers the choice to transact at a fixed strike on a specified expiry date. Buyers pay a premium, while sellers receive it and post margin. It uses a call example to show that a favorable price direction alone is insufficient: the market must cross the strike by expiry, and the premium affects the buyer’s net result. Puts can hedge an existing holding, while options also allow speculation on a price level and date.
It describes European exercise and cash settlement, time decay, and how options differ from linear futures and perpetual-style contracts. Buyer losses are limited to the premium; short-option losses can be substantial, with uncovered calls described as potentially unlimited. The document also discusses liquidity across separate strike and expiry contracts, order slippage, and seller liquidation. Its examples are illustrative rather than performance evidence, and outcomes depend on contract terms, settlement formulas, market liquidity, and timing. The explanation centers on one exchange’s product rules, so those operational details should not be assumed to apply to every options venue.
Key ideas
- A call gives its buyer the right to buy at the strike, while a put gives the right to sell.
- The buyer’s maximum loss is the premium paid, whereas option sellers post margin and can face much larger losses.
- A buyer’s payoff depends on the settlement price relative to the strike at expiry, as well as the premium paid.
- European options can be exercised only at expiry, and cash settlement does not deliver the underlying asset.
- Options can hedge holdings or express a view that includes both a price level and a deadline.
- Liquidity and slippage vary across contracts with different strikes and expiries.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.