Basics
Nothing works without the basics
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.
Practical
Option Exercise
What matters here is the difference between American style, European style, physical delivery, and cash settlement.
- Stocks and ETFs Often lead to delivery of 100 shares.
- Indices Are often settled in cash only.
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.
Spreads
Bull & Bear Spreads
Vertical spreads combine two options with the same expiration and different strikes.
- Credit Bull put and bear call start with premium received.
- Debit Bull call and bear put start with premium paid.