> For the complete documentation index, see [llms.txt](https://help.rails.xyz/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://help.rails.xyz/trading/options/intro-to-options.md).

# Intro to Options

{% hint style="danger" %}

#### Disclaimer

Options trading is risky and may not be suitable for everyone. This guide is educational only. It is not financial, legal, or investment advice.
{% endhint %}

### What is an option?

An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a fixed price on a specific expiry date.

That fixed price is the **strike**. The upfront cost of the contract is the **premium**.

On Rails, options are:

* **European-style:** meaning they can be exercised at expiry only.
* **Cash-settled:** settlement is paid in cash (USDT) against the underlying's settlement price at expiry (08:00 UTC). There is no manual exercise step and no delivery of the underlying asset.

### Calls and puts

There are two option types:

* **Call** — generally gains value when the underlying rises.
* **Put** — generally gains value when the underlying falls.

Calls express bullish exposure. Puts express bearish exposure.

### Key terms

<table data-search="false"><thead><tr><th width="275.64453125">Term</th><th>Meaning</th></tr></thead><tbody><tr><td>Underlying / Index price (<span class="math">F</span>)</td><td>The reference price used for pricing and risk.<br><br>At Rails, <span class="math">F = P_{index}</span> and is sourced from our <a href="/pages/QLMYpTm831YuVLgLZnGI">Index Price Sources</a>.</td></tr><tr><td>Strike price (<span class="math">K</span>)</td><td>The price that defines the option's payoff at expiry.</td></tr><tr><td>Expiry (<span class="math">T</span>)</td><td>The time remaining until the contract expires, in years.</td></tr><tr><td>Premium (<span class="math">p</span>)</td><td>The price paid by the buyer and received by the seller.</td></tr><tr><td>Mark price (<span class="math">P_\text{mark}</span>)</td><td><p>The platform fair value used for margin, unrealized P&#x26;L, liquidation, and risk.</p><p><em>Note: Mark price is a model-based reference. It is not always the same as the last traded price.</em></p></td></tr><tr><td>Implied volatility (<span class="math">\text{IV}</span> or <span class="math">\sigma</span>)</td><td>The market's annualized expectation of future volatility.</td></tr><tr><td>Intrinsic value</td><td>The amount the option would be worth if it expired now.</td></tr><tr><td>Time value</td><td>The portion of premium above intrinsic value.</td></tr></tbody></table>

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On Rails, 1 contract = 1 unit of underlying exposure. For example, 1 BTC option contract = 1 BTC of exposure.
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### Intrinsic value, time value, and moneyness

Intrinsic value depends on the relationship between the index price and the strike:

$$
\text{Call intrinsic value} = \max(F - K, 0)
$$

$$
\text{Put intrinsic value} = \max(K - F, 0)
$$

Time value is the remaining part of the premium:

$$
\text{Time value} = \text{Option premium} - \text{Intrinsic value}
$$

This leads to three common moneyness terms:

<table><thead><tr><th width="312.8515625">Moneyness</th><th width="107.015625">For Calls</th><th width="107.14453125">For Puts</th></tr></thead><tbody><tr><td><strong>In the money (ITM);</strong> the option has intrinsic value.</td><td><span class="math">F > K</span></td><td><span class="math">F &#x3C; K</span></td></tr><tr><td><strong>At the money (ATM);</strong> the strike is near the current index price.</td><td><span class="math">F \approx K</span></td><td><span class="math">F \approx K</span></td></tr><tr><td><strong>Out of the money (OTM);</strong> the option has no intrinsic value.</td><td><span class="math">F &#x3C; K</span></td><td><span class="math">F > K</span></td></tr></tbody></table>

An OTM option can still trade at a premium because it still has time value.

### Buyers and sellers

Every option has a buyer and a seller.

* The **buyer** pays premium upfront and has defined downside equal to that premium.
* The **seller** receives premium upfront and takes on the obligation opposite the buyer's right.
* Short options require collateral, and losses can exceed premium received.

Time usually works against buyers and in favor of sellers.

### Why option prices move before expiry

Option prices can move even when the contract is far from expiry.

The main drivers are:

1. **Index price changes** — calls and puts respond differently as the underlying moves.
2. **Implied volatility changes** — higher implied volatility usually makes options more expensive.
3. **Time passing** — time value usually decays as expiry approaches.

These sensitivities are summarized by the Greeks. For formulas and calculations, see [Black-76 & the Greeks](/trading/options/black-76-and-the-greeks.md).

### Reading the option chain

The option chain lists every available contract, grouped by expiry date. Most options chains follow these conventions:

* Calls to the left (1)
* Strike Price at the center (2)
* Puts on the right (3)

<figure><img src="/files/L2hgXTFA0JmmqmcXM72l" alt=""><figcaption><p>Options Chain View on Rails</p></figcaption></figure>

* **Ask price:** what you pay to buy an option now
* **Bid price:** what you receive to sell an option now
* **Mark price:** the reference price used for margin and unrealized P\&L. It is not always the price you can trade at immediately.
* **IV:** implied volatility, or the market's expectation of future price swings
* **Volume:** how many contracts traded during the selected period
* **Open interest:** how many contracts remain open

### Where to go next

* [Black-76 & the Greeks](/trading/options/black-76-and-the-greeks.md) — how Rails calculates option marks and Greeks.
* [Expiry & Settlement](/trading/options/expiry-and-settlement.md) — how contracts settle at expiry.
* [Metrics Guide](/trading/options/options-metrics-guide.md) — contract, premium, and payoff formulas.