Basics

What you should know about options before you start

A compact foundation for calls, puts, volatility, and option risk.

Core

Call and Put

Calls benefit from rising prices, puts from falling prices. Both behave asymmetrically.

Call Right to buy the underlying.
Put Right to sell the underlying.

Pricing

Implied Volatility

IV shows how much movement the market is pricing in and directly affects option prices.

High IV Options are usually more expensive.
Low IV Options are usually cheaper.

Strike

Moneyness

Moneyness describes whether an option is in the money, at the money, or out of the money.

ITM The option already has intrinsic value.
ATM Price and strike are close to each other.
OTM The option consists almost entirely of time value.

Risk

Time Decay and Greeks

Theta, Delta, Gamma, and Vega determine how an option position reacts in the market.

Theta Daily time decay.
Delta/Gamma Direction and acceleration of the position response.