Options are derivatives: understanding the key differences between buying and selling

When you start trading options, it’s important to understand that an option is a financial instrument with fundamentally different rules for each party involved in the contract. Before choosing your trading strategy, you need to clearly understand how these contracts work and what risks they carry.

What is an option — Basic Principles

An option is a derivative that grants one party the right, and the other party the obligation. In fact, an option is a contract where the buyer gains the right (but not the obligation) to buy or sell the underlying asset at a predetermined price at a specific time. To acquire this right, the buyer pays a premium — the option price, which compensates the seller for the risk they assume.

When you understand that an option is an agreement with asymmetric obligations, it becomes clear why buyers and sellers need completely different risk management strategies.

Rights and obligations: how they differ for buyers and sellers

The main difference is that an option is a contract that distributes rights and obligations unevenly.

Option buyer’s position: The person who buys the option gains the right to choose. After paying the premium, they can decide whether to exercise this right or not. If market conditions are favorable, the buyer exercises the option and makes a profit. If the situation develops unfavorably, they simply do not exercise the option, and their maximum loss is limited to the paid premium.

Option seller’s position: Conversely, the seller has an obligation to fulfill the contract if the buyer chooses to do so. As compensation for accepting this risk, the seller receives the premium, which remains theirs regardless of how events unfold. However, if the market moves strongly against the seller’s position, their losses can be significant.

That’s why an option is a tool that requires radically different approaches to portfolio management for each side.

Potential profits and losses: why strategy choice is so important

When you understand that an option is an agreement with limited risk for one party and unlimited for the other, choosing your position becomes critical.

For call options (the right to buy):

• Buyer of a call option: Has unlimited potential profit if the price rises, but their maximum loss is the paid premium.
• Seller of a call option: Keeps the premium as maximum profit, but potential losses are unlimited.

For put options (the right to sell):

• Buyer of a put option: Can profit up to (strike price minus premium) if the price falls, but maximum loss is the paid premium.
• Seller of a put option: Receives the premium but can incur losses up to (strike price minus premium).

This asymmetry shows why an option is not just a financial instrument but a strategic choice that defines your risk profile.

Costs and commissions: what to consider when trading options

When trading options, it’s not just about profits and losses from the contract’s price. There are also trading costs that affect your final outcome.

On the Bybit platform, trading commissions are:

• 0.02% for makers (those placing limit orders)
• 0.03% for takers (those executing existing orders)
• 0.015% fee for funding when closing a position

It’s important to note that total trading fees plus funding fees do not exceed 12.5% of the option’s price per contract. Additionally, liquidation incurs a separate 0.2% fee.

Options trading involves these costs because the premium can be relatively small, making trading expenses potentially a significant percentage of your potential profit.

Margin requirements: why option sellers need to provide collateral

The final key point is margin. An option is a contract where margin requirements differ depending on whether you are buying or selling.

Long positions (buying an option): If you buy an option, you need enough funds to pay the premium, but maintenance margin is not required. You have already paid the entire risk upfront.

Short positions (selling an option): If you sell an option, you must maintain a margin account with sufficient collateral to ensure you can fulfill your obligations if the option is exercised. On Bybit, this margin is approximately 10–15% of the underlying asset’s price.

This means that an option trade involves sellers holding additional capital, whereas buyers only pay the premium. When considering an option trade, it’s crucial to ensure you have enough funds to cover the margin when selling and the premium when buying.

By understanding these differences, you are better prepared to choose a position that aligns with your trading style and risk management approach. Remember, an option is a tool that offers control over risk — but only if you fully understand the rules of the game.