Options explained: Calls, puts and key risks

Buying an option gives traders a way to gain exposure to price moves, or hedge against them, by paying an upfront premium for a defined right. This article breaks down how call and put options work, what each side of the trade involves and which risks matter most before you place your first contract on Bybit.

Key Takeaways:

• For buyers, calls provide upside exposure while puts provide downside exposure or protection.

• Buyers pay a premium for a right while sellers receive the premium and accept an obligation.

• An option can be in the money without being profitable after the premium and applicable fees.

What are call and put options?

An option is a contract that gives the buyer a right, but not an obligation, tied to the price of an underlying asset. The buyer pays a premium to the seller in exchange for that right.

A call option gives the buyer upside exposure. A put option gives the buyer downside exposure or protection. In conventional terms, a call gives the buyer the right to buy at the strike, while a put gives the buyer the right to sell. Bybit Options covered here are European-style and cash-settled, so they are exercised only at expiration and do not involve physical delivery.

Key terms

• Underlying asset: the asset the option's value is derived from (e.g. BTC or ETH)

• Strike price: the price level that determines the option's payoff

• Expiry: the date and time at which the contract settles

• Premium: the upfront cost a buyer pays (and a seller receives) to enter the contract

Calls, puts, buyers and sellers

Every options trade has two sides: a buyer and a seller.

Beginners often start by buying calls or puts, while selling options carries greater risks, including margin requirements and liquidation. Puts aren't just for bearish traders, either. They can also help protect an existing position against falling prices.

Simple example: ITM does not always mean profitable

Assume 1 BTC of option quantity. You buy a BTC call option with a $100,000 strike and pay a $500 premium. At expiry, BTC settles at $100,300.The option is in the money (ITM) because the settlement price is above the strike, giving it an intrinsic value of $300. But you paid $500 in premium. After subtracting that cost, the trade produces a net loss even though the option expired ITM.

Before fees, the call breakeven is strike + premium, or $100,500 in this example. Applicable fees increase the effective cost. The same principle applies to puts: the underlying price must fall far enough below the strike to cover the premium paid and any applicable fees.

Key risks for call and put options buyers

The maximum loss on a long option is generally the premium paid plus applicable fees. Several factors can erode value before expiry:

• Time decay. All else equal, an option's time value generally declines as expiry approaches.

• Implied volatility changes. If the market expects less price movement, premiums can drop even when the underlying price has not changed.

• Liquidity risk. In less liquid markets, exiting at the expected price may be difficult.

Selling options carries greater risks, including potentially large losses and liquidation. However, be aware that buying isn't risk-free either. Repeatedly paying premiums for options that expire worthless can lead to significant losses over time.

How Bybit Options settle

Bybit's crypto options are European-style: they can only be exercised at expiry. Settlement is automatic and cash-based.

• ITM options: the buyer receives the option's intrinsic value in the settlement asset, based on the strike and final settlement price.

• OTM options expire without intrinsic value. The buyer loses the premium paid, with applicable fees adding to the total cost.

Settlement terms can vary between Options products, so it's worth checking the details of the contract you plan to trade.

When might beginners buy calls or puts?

• Long call for upside exposure. You believe the price will rise and want exposure with a predefined upfront cost.

• Long put for downside protection. You hold a position and want to limit losses if the market drops, or you have a bearish view.

Choose a strike and expiry that suit your market outlook, timeframe and budget. Keep in mind, though, that even a carefully chosen option doesn't guarantee a profit or protect you from every loss.

The bottom line

Calls and puts can be used to express a market view or protect an existing position. Buyers pay an upfront premium for a right, while sellers receive the premium but take on an obligation and potentially much greater risk. Even ITM options are not always profitable once the premium and fees are factored in, so understanding the full cost of each trade matters from the start.

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