- Call option: When you believe an asset's price will rise, you can buy a call option, which gives you the right to buy the asset at a specific price within a certain time frame in the future. If the asset price goes up on the expiration date, you can buy the asset at the agreed-upon price and sell it for a profit. If the asset price goes down, all you lose is the cost of buying the option.
- Put option: If you believe an asset's price will fall, you can buy a put option, which gives you the right to sell the asset at a specific price within a certain time frame in the future. If the asset price goes down on the expiration date, you can sell the asset at the agreed-upon price and make a profit. If the asset price goes up, you can simply give up the right to sell the asset and only lose the cost of buying the option.
Options can also be classified based on where they're traded: on exchange or off-exchange.
- Exchange-traded options: Publicly traded on an exchange and managed by the exchange, they have higher liquidity and lower trading costs but may be harder to trade due to exchange regulation.
- Over-the-counter (OTC) options: Privately negotiated between two parties with more flexibility and wider applicability, but both parties must assume counterparty risk, and trading costs are higher.
Another important factor is the exercise style, which is closely related to the option's expiration date. There are two types of exercise styles: European and American.
- European options: Can only be exercised on the expiration date. Their price is mainly affected by the expiration date and the underlying asset price. Although they cannot be exercised early, they can be sold to other market traders.
- American options: Can be exercised at any time before the expiration date, making them more flexible but also more expensive due to higher risk and cost. Their prices depend on the expiration date, underlying asset price, and other factors such as changing volatility over time.
European options are cheaper but less flexible, while American options are more expensive but have higher flexibility and value. There are other exercise styles, such as Asian options and Bermuda options, which cater to different investment goals and risk preferences.
At Coincall, European-style options are used.