Intro to Options

Learn the terms, contract mechanics, and pricing language used in Rails options.

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.

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

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

On Rails, 1 contract = 1 unit of underlying exposure. For example, 1 BTC option contract = 1 BTC of exposure.

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:

Moneyness	For Calls	For Puts
In the money (ITM); the option has intrinsic value.	$F > K$	$F < K$
At the money (ATM); the strike is near the current index price.	$F \approx K$	$F \approx K$
Out of the money (OTM); the option has no intrinsic value.	$F < K$	$F > K$

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.

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)

Options Chain View on Rails

• 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 — how Rails calculates option marks and Greeks.

• Expiry & Settlement — how contracts settle at expiry.

• Metrics Guide — contract, premium, and payoff formulas.