Options are a type of financial derivative that gives the holder the right to buy or sell the underlying asset at a specific price at a specific time in the future, but does not have the obligation to exercise the right. Options are divided into call options and put options. Specifically:
Call Option: Gives the holder the right to buy the underlying asset at a predetermined price before the expiration date. If the market price is higher than the strike price, the option holder can earn a profit by buying the asset at a low price and selling it at a high price in the spot market.
Put Option: Gives the holder the right to sell the underlying asset at a predetermined price before the expiration date. If the market price is lower than the exercise price, the holder can sell the asset at a high price and buy it back at a low price in the market to earn the difference.
Key Features of Options
Rights vs. obligations: Options give the holder the right to buy or sell, but do not require execution. If the option is unprofitable on the expiration date, the holder can choose not to exercise it and only lose the option premium paid.
Option Premium: There is a fee to buy an option, called the option premium. It is the cost of holding the right. If the market moves against you, the option premium is the only money you lose.
Expiration date: Options have a specific expiration date. The option holder must decide whether to exercise the option before the expiration date. Unlike perpetual contracts, options are time-limited.
So what is the option delivery we often talk about?
Option delivery refers to the process by which the holder settles or executes the option contract when the option expires. Depending on the option type and specific contract terms, delivery can be divided into two main forms:
1. Physical Delivery:
When the option expires, if the option holder chooses to exercise the option, the actual asset (such as stocks, commodities, cryptocurrencies, etc.) will be delivered between the two parties. For example, if you hold a call option, when it expires, the holder can buy the underlying asset at the exercise price specified in the contract.
For example, if the holder has a call option on Bitcoin with an exercise price of $30,000 and the market price at expiration is $35,000, upon exercise, the holder will purchase Bitcoin at $30,000 and can choose to sell it on the spot market to earn the difference.
2. Cash Settlement:
Unlike physical delivery, cash settlement is the direct settlement of the price difference in cash when the option expires, rather than delivering the actual underlying asset. At this time, the holder does not need to actually buy or sell the underlying asset, but instead makes a cash settlement based on the difference between the option exercise price and the market price at expiration.
For example: Suppose you hold a Bitcoin put option with a strike price of $30,000, and the market price at option expiration is $25,000. Since the market price is lower than the strike price, you will receive the $5,000 difference as cash settlement without actually selling Bitcoin.
The significance of delivery
Exercise and abandonment of options at expiration: When an option expires, the holder can choose to exercise the option (if the option is profitable) or abandon the option (if the option is not profitable) based on the market price.
Market impact: Options expiration dates usually bring market volatility because a large number of contracts need to be settled and investors will adjust their positions.
Impact on the futures market: Option delivery is different from futures delivery. Option holders can choose not to exercise their options, while futures contracts are usually forced to be delivered or closed upon expiration.
Types of option delivery:
American option: The holder can exercise the option at any time before the expiration date.
European option: The holder can only exercise the option on the expiration date.
Advantages and disadvantages comparison
Options
advantage:
Limited Risk: Maximum loss is only the option premium paid.
High profit potential: If the market moves as expected, the profit could far exceed the option premium.
Flexibility: You can choose to exercise or not exercise the option.
shortcoming:
Expiration risk: Options have an expiration date, and the holder needs to make a decision before the expiration date, otherwise the option may become invalid.
Complexity: Options strategies can be complex, especially for novice traders.
Perpetual Contracts
advantage:
Strong flexibility: There is no expiration date and traders can close their positions at any time.
Funding rate mechanism: Keep prices close to the spot market, allowing for opportunities for arbitrage operations.
shortcoming:
High long-term holding costs: Funding rates accumulate over time, and the cost of holding a position for a long time may be very high.
High risk: Especially when using high leverage, volatile market conditions may lead to liquidation of your account.
Leverage Trading
advantage:
Real asset holdings: You can hold real assets and perform secondary operations such as pledging or lending.
High return potential: Leverage amplifies the transaction size and the returns may be multiplied.
shortcoming:
High Risk: Leverage amplifies the impact of market fluctuations, especially in high-leverage operations, which may lead to liquidation.
Interest costs: The longer you hold a position, the higher the interest costs, especially in highly leveraged situations.
Summarize:
Option delivery is a critical moment in option trading, which determines whether the holder will cash out the right. Delivery can be completed through physical delivery or cash delivery, depending on the type of option contract and the choice of the holder. In the cryptocurrency options market, European options dominate due to their easy management and standardization. Investors usually make the decision whether to exercise the option based on market conditions on the option expiration date.
