What is an option: key differences between buying and selling

An option is one of the most important tools in financial markets, allowing traders to implement various trading strategies. There is a fundamental difference between the role of the option buyer and the seller — each position has its own mechanisms for profit, risk management, and financial requirements. Let’s understand what an option means and how these two opposing strategies work.

An option is a derivative contract: basic rights and obligations

Essentially, an option is an agreement between two parties that grants the buyer the right (but not the obligation) to buy or sell the underlying asset at a predetermined price on a specific date. However, to obtain this right, the buyer must pay a premium — a fixed amount that becomes income for the seller.

Participants in this deal have radically opposite roles. The option buyer gains the right to choose: they can either exercise the contract and profit or decline to exercise if market conditions are unfavorable. Their maximum loss is limited to the amount of the premium paid — they cannot lose more than that.

The option seller, on the other hand, assumes the obligation to fulfill the contract terms if the buyer decides to exercise the option. This obligation can lead to losses for the seller, as the market price may deviate from the strike price (set in the contract) in an unfavorable direction. However, the seller receives compensation in the form of the premium immediately upon entering the deal.

Comparing potential income: how buyers and sellers of options profit

Understanding the profit and loss profile is critical for choosing a trading strategy. For a call option (a contract to buy the underlying asset), the picture is as follows: the buyer can achieve unlimited profit if the asset’s price significantly exceeds the strike price, but their loss is limited to the premium paid. The seller, meanwhile, receives the maximum profit equal to the premium, but faces potentially unlimited losses if the asset’s price rises sharply.

For a put option (a contract to sell), the risk structure is different. The buyer’s maximum profit is limited to the difference between the strike price and the premium paid — the asset cannot be worth less than zero. The maximum loss for the buyer is the premium. The put seller receives the full premium as maximum profit, but their loss can be the difference between the strike price and the premium.

Thus, the strategy of buying options attracts traders who want to limit risk while maintaining the potential for unlimited profit. This asymmetric reward profile is ideal for speculative positions with increased confidence in a certain price movement direction.

Calculating financial results at option expiration

At the expiration date, the financial outcome for both parties is calculated using a simple formula. For the buyer, it’s realized profit minus the premium paid. For the seller, it’s the received premium minus the realized loss.

However, the ready P&L (profit and loss) includes trading commissions and contract execution fees. The platform applies the following commission rates:

• Maker trading fee: 0.02%
• Taker trading fee: 0.03%
• Contract execution fee: 0.015%

It’s important to note that the total trading commission and execution fee for one contract cannot exceed 12.5% of the option’s price. Additionally, a separate liquidation fee of 0.2% is charged. These fees significantly impact overall profitability, especially with active trading and frequent contract rollover.

Margin requirements for trading options

One of the key differences between buying and selling options lies in the margin requirements — the funds that traders must hold in their account to guarantee obligations.

A long option buyer does not require any margin. After paying the premium, the buyer fully controls their position: they can exercise the option or wait until expiration without any additional financial obligations. This makes buying options an accessible strategy with predictable maximum losses.

A short option seller, on the other hand, must maintain sufficient margin in their account. The margin guarantees that the seller can fulfill their obligations if the option is exercised. Current requirements range from 10% to 15% of the underlying asset’s value, meaning a significant amount of capital is tied up. These requirements vary depending on market volatility and differ between regular margin and portfolio margin modes.

Understanding that an option is a tool with asymmetric rights and obligations is critical for making the right trading strategy choice based on your capital, risk appetite, and market outlook.