Understanding Options (Options): From Basics to Advanced Trading Strategies

What Are Options? A Detailed Definition of Options

Options are derivative contracts that give the holder the right – but not the obligation – to buy or sell a specific asset at a predetermined price, on or before the expiration date. This is a powerful financial tool that allows investors to optimize their portfolios without directly purchasing the underlying asset.

Key features of Options:

First, they are derivative instruments that provide investors with exposure to assets such as Bitcoin, Ethereum, stock indices, or ETFs without actual ownership. Investors can participate in the market without storing or managing physical assets.

Second, Options allow the application of financial leverage. With a small capital, you can control a large position. For example, with $1,000 and a leverage ratio of 1:100, you can open a position equivalent to $100,000.

Third, unlike traditional trading, investors can profit even when the market declines. This opens up more strategic opportunities compared to just waiting for price increases.

Basic Structure of an Options Contract

To understand more deeply what options are, it’s important to grasp the components that make up this contract:

Expiration Date: This is the last day the holder can exercise the option. After this date, the option becomes invalid. Imagine opening an option expecting Bitcoin to rise to $32,000 by 15/6/2023 – that’s your expiration date.

Strike Price: This is the fixed price in the contract at which the holder has the right to buy or sell the asset. This price remains fixed during the contract’s validity. If you buy a call option with a strike price of $31,500, that’s the price at which you can buy Bitcoin.

Premium: To have the right to trade options, the holder must pay a certain fee. If you do not exercise the right, this fee is lost. It is the fixed cost for that option.

Contract Size: The quantity of the asset that can be traded in one options contract, usually fixed for each asset type.

Call Options vs Put Options: The Two Main Types of Options

Options are divided into two main types with completely different uses.

( Call Options – Rights to Buy

This contract grants the buyer the right – but not the obligation – to purchase the underlying asset at the specified strike price. Investors buy call options when they forecast the asset’s price will rise.

Real-world example: Bitcoin’s current price is $29,800. You believe Bitcoin will rise above $33,000 by 30/5. You buy a call option with a strike price of $31,000. If at expiration Bitcoin is actually at $35,000, you can buy at $31,000 and sell immediately at the market price.

In call options, the maximum loss is limited to the premium paid, but the profit potential is unlimited as the price increases.

Three states of call options:

• In the Money (ITM): Strike price is below the current market price – the option is profitable
• At the Money (ATM): Strike price is close to the market price – breakeven point
• Out of the Money (OTM): Strike price is above the market price – the option is not profitable yet

) Put Options – Rights to Sell

Conversely, put options allow the holder to sell the underlying asset at a specified strike price. Investors buy put options when they forecast the price will decline.

Real-world example: Bitcoin is at $29,000. You worry the market might drop. You buy a put option with a strike price of $27,500. If Bitcoin falls to $24,000, you can still sell at $27,500 instead of being “cut to pieces” at a lower price.

Three states of put options:

• In the Money (ITM): Strike price is above the current market price – profitable
• At the Money (ATM): Strike price is close to the market price
• Out of the Money (OTM): Strike price is below the market price – not profitable yet

Comparison table of Call Options vs Put Options:

Comparing Options and Futures

Although both are derivative tools, the biggest difference lies in the obligation:

• Options: The holder has the right but is not obliged to exercise
• Futures: The holder is obliged to buy/sell the asset at expiration

This makes options more flexible, but they often come with higher (premium) costs than futures.

Basic Options Trading Strategies

( Covered Call – Selling a Covered Call

An investor owns the asset and sells a call option on it. If the price exceeds the strike, the asset will be called away, but you have collected the premium.

Use case: You own 1 Bitcoin at $28,000 and sell a call option at $32,000. You earn extra premium, and if the price doesn’t reach $32,000, you keep the Bitcoin plus the premium.

) Long Put – Buying a Put

Buy put options when you forecast a decline. If correct, profits can multiply. The maximum loss is limited to the premium paid.

Use case: You worry about a market downturn. You buy a put at $26,000. If the market drops to $20,000, you can sell at $26,000, gaining significant profit.

( Married Put – Combining Ownership and Insurance

Own the asset and buy a put as a form of insurance against downside risk. If the price drops, the put offsets the loss.

Use case: You own Bitcoin at $29,000 and believe the price will rise, but want protection. You buy a put at $27,000. If Bitcoin falls to $25,000, the put limits your loss to $27,000.

Advantages and Disadvantages of Options Trading

) Clear Advantages

Profit Opportunities in Down Markets: Unlike traditional trading (buy and wait for increase), you can profit from falling prices via puts. This greatly expands profit opportunities.

Effective Risk Protection: Options act like insurance. The risk is clearly defined upfront – at most, you lose the premium. Compared to other contracts, this is a significant benefit.

Leverage Power: With small capital, you can control large positions, optimizing returns relative to invested capital.

Strategic Flexibility: You can combine various options with different expiration dates and strike prices to create complex strategies tailored to your goals.

( Notable Challenges

High Complexity: Trading options requires deep understanding of many technical concepts and regulations. Beginners may find it difficult to grasp the full mechanism.

High Margin Requirements: To open an options position, you need to deposit a certain margin. Trading costs are often higher than futures or stocks, especially with full brokerage services.

Unlimited Risk for Sellers: While buyers only risk the premium, sellers face unlimited risk. You are obligated to buy/sell at the strike price regardless of market conditions.

Margin Calls: If your account cannot maintain the required margin, your broker may force you to close positions or deposit more funds. During volatile periods, this can happen quickly.

Systemic Risks: History shows that overconfident use of options without proper risk management can lead to financial disasters, such as platform collapses due to excessive margin calls and market volatility.

The Current State of Options Trading in Vietnam

In Vietnam, options trading is not yet clearly regulated separately. According to Decree 158/2020/NĐ-CP, options trading is permitted mainly in OTC )general direct trading### and mainly serves large business organizations.

Currently, the only derivative product on the Vietnamese stock market is the VN30 Futures Contract. This aligns with international standards because the stocks in the VN30 basket are selected based on market representation, liquidity, and free float.

According to HNX statistics until the end of November 2022:

• Derivative trading accounts exceeded 1.15 million
• VN30 Futures Contract trading volume increased from 10,954 contracts per session (in 2017) to nearly 250,000 contracts per session (in the first 11 months of 2022)

With rapid growth, the Vietnamese stock market is likely to expand its derivative offerings in the future.

Where to Trade Options

Since the Vietnamese stock market currently only supports VN30 Futures, investors wishing to trade options need to turn to international platforms. Some popular options include international Forex brokers.

Criteria for choosing an options trading platform:

1. Regulated by an international financial authority: Check if the platform is supervised by agencies like FCA, CySEC, ASIC.

2. Full-featured tools: Look for platforms offering negative balance protection, risk management tools, free technical analysis charts.

3. Professional customer service: Support in Vietnamese, quick responses, effective problem resolution.

4. User-friendly interface: Platforms that work well on Web, Mobile, and other devices. Easy for beginners.

5. Flexible leverage: Platforms should offer various leverage options (from 1:1 to 1:200) for suitable choices.

6. Demo account: Should have practice accounts with virtual funds for learning before real trading.

Getting Started with Options Trading

( Basic Process

Step 1: Deep Understanding Before starting, you need to understand what options are, how they work, the types, and potential risks. Refer to books, educational videos, or online courses.

Step 2: Practice on Demo Accounts Most platforms offer demo accounts with virtual funds. Trade on demo for at least a few weeks to familiarize yourself with the interface and trading feel.

Step 3: Start Small When switching to real accounts, begin with small positions. Gradually increase size as you gain experience and confidence.

Step 4: Focus on One Asset In the initial phase, only trade one asset you know well )e.g., Bitcoin###. This helps you deeply understand the market before expanding.

Step 5: Build a Clear Strategy Define profit targets, stop-loss levels, position sizes. Follow your plan with discipline.

( Effective Risk Management

• Always set stop-loss: Predefine the price level to close the position if the market moves against you.
• Avoid excessive leverage: While high leverage can increase profits, it also increases risks proportionally.
• Diversify: Instead of putting everything into one position, spread risk.
• Control emotions: Don’t let fear or greed drive your trading decisions.

Conclusion

Options are a powerful financial tool that opens up many new trading opportunities. However, this power comes with high complexity and significant risks. Success with options requires:

1. Deep understanding of how they operate
2. Continuous practice on demo accounts
3. Disciplined risk management in every trade
4. Patience and avoiding rushing to expand positions

Remember, options trading is not a quick path to wealth. It’s a skill that develops gradually. Start small, learn from each trade, and steadily build your skills. When you gain enough experience and have a clear strategy, options can become a valuable tool to optimize your investment portfolio.