An option gives you the right — but not the obligation — to buy or sell 100 shares of a stock at a fixed price before a set expiration date. You pay a premium for this right. Your maximum loss as a buyer is always just that premium.
Underlying
Stock
1 contract = 100 shares
Strike price
$150
Fixed buy/sell price
Expiration
30 days
Contract end date
Premium
$3.00
Cost per share ($300 total)
Two types: Calls give the right to BUY shares. Puts give the right to SELL shares. Each profits from a different market direction.
Why options instead of stocks?
Options provide leverage — a $300 option controls $15,000 worth of stock. A 10% stock move can produce a 100%+ option return. They also let you profit from falling stocks and generate income from shares you own.
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Call Options
Calls — betting the price rises
A call option gives you the right to buy 100 shares at the strike price before expiry. You buy calls when you expect the stock to rise above the strike.
Example: Apple (AAPL) at $170
You buy a $175 call for $2.50 premium — total cost: $250.
+
AAPL rises to $190 — profit $15/share minus $2.50 premium
+$1,250
-
AAPL stays at $172 — below strike, expires worthless
-$250
-
AAPL drops — expires worthless. Loss capped at premium
-$250
As a call buyer your loss is always capped at the premium paid. Gains are theoretically unlimited.
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Put Options
Puts — betting the price falls
A put option gives you the right to sell 100 shares at the strike price. You profit when the stock drops below the strike. Puts also work as portfolio insurance.
Example: Tesla (TSLA) at $250
You buy a $245 put for $4.00 premium — total cost: $400.
-
TSLA drops to $210 — sell at $245 vs market $210. Profit $35 minus $4 premium
+$3,100
-
TSLA stays at $248 — above strike, expires worthless
-$400
+
TSLA rises — no reason to exercise, expires worthless
-$400
Puts also serve as portfolio insurance — a put guarantees you can sell at the strike no matter how far the stock falls.
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Expiration Dates
Expiration dates — your countdown clock
Every options contract has an expiration date — the last day it can be exercised. Time is the enemy of buyers and the friend of sellers.
Weekly
7 days
Expire every Friday. Cheap but decay fast.
Monthly
~30 days
Most popular. 3rd Friday of each month.
LEAPS
1–3 years
Long-term — less decay pressure.
0DTE
Same day
Zero days to expiry — highly speculative.
What happens at expiration?
+
In the money (ITM) — has value, auto-exercised by most brokers
Exercised
-
Out of the money (OTM) — expires worthless. Premium is lost
Worthless
Pro tip: Most traders sell the option back before expiry to lock in gains or cut losses — avoiding assignment risk.
Options lose value slowly at first, then rapidly in the final 2–3 weeks. This acceleration is called theta decay.
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Strike Prices
Strike prices — choosing your target
The strike price is the fixed price at which you can buy (call) or sell (put) shares. Your strike choice determines probability of profit, cost, and risk/reward.
In the money (ITM)
Stock past strike
Has intrinsic value. Higher delta, more expensive.
At the money (ATM)
Strike = Stock
Max time value. Delta ~0.50. Most liquid.
Out of the money (OTM)
Not there yet
No intrinsic value. Cheapest. Lower probability.
The golden rule: Cheaper OTM strikes have lower probability. More expensive ITM strikes are higher probability. You always pay for probability.
Intrinsic value
Real exercisable value right now. For a call: stock minus strike. Zero if OTM.
Time value
Extra premium above intrinsic value. Reflects future potential. Decays to zero by expiration.
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Bid, Ask & Spread
Bid, ask & spread — the cost of trading
The bid-ask spread is the hidden cost in every options trade. On illiquid options it can silently eat a large portion of your profit.
Bid
$2.40
Highest price any buyer will pay. You receive this when selling.
Ask
$2.60
Lowest price any seller accepts. You pay this when buying.
Spread
$0.20
Ask minus bid = $20/contract of immediate friction.
Midpoint
$2.50
Use limit orders at the mid — never hit the ask.
Always use limit orders. Set your limit at the midpoint. Wide spreads hurt both entry and exit.
Widens spreads
Low volume · Far OTM strikes · Small-cap stocks · Near earnings
Tightens spreads
High volume · ATM strikes · Popular stocks (SPY, AAPL, QQQ)
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Key Vocabulary
Key terms every options trader uses
In the moneyOption has intrinsic value. Call: stock above strike. Put: stock below strike.
Out of the moneyNo intrinsic value yet. Stock hasn't moved past the strike in your favor.
PremiumThe price paid for the option. Your maximum loss as a buyer.
BreakevenCall: strike + premium. Put: strike - premium. Where you start making money.
ThetaTime decay — the daily erosion of an option's value as expiry approaches.
DeltaHow much the option price moves per $1 move in the stock. Calls: 0 to 1. Puts: 0 to -1.
Implied volatilityThe market's forecast of future movement. Higher IV = more expensive options.
Open interestNumber of outstanding contracts. High OI = liquid market with tighter spreads.
Most traders never exercise their contracts — they buy to open and sell to close, pocketing the difference in premium.
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Analysis
Technical analysis
Technical analysis studies price charts, volume, and patterns to forecast future price movements. It assumes all information is reflected in price — so reading the chart predicts what comes next.
Support & Resistance
Price floors & ceilings
Support = price bounces up. Resistance = price stalls or reverses.
Moving Averages
50-day, 200-day
Above 200-day MA = uptrend. Golden cross signals bullish momentum.
High volume confirms price moves. Low-volume breakouts often fail.
Bullish patterns
Cup and handle · Bull flag · Ascending triangle · Golden cross
Bearish patterns
Head and shoulders · Bear flag · Descending triangle · Death cross
Technical analysis helps options traders time entries and select strikes. Technicals tell you when and where — not why.
Limitation: Technical analysis is backward-looking and cannot predict news events or fundamental changes.
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Analysis
Fundamental analysis
Fundamental analysis evaluates a company's financial health and business value to determine if its stock is over or underpriced.
Fundamentals tell you what to buy. Technicals tell you when to buy it. Many successful traders combine both approaches.
P/E Ratio
Price/Earnings
How much investors pay per dollar of earnings. High P/E = growth expectations.
Revenue growth
YoY %
Is the company growing? Consistent growth drives long-term stock appreciation.
EPS
Earnings/share
Rising EPS drives stock prices. Falling EPS is a red flag.
Debt/Equity
Leverage ratio
How much debt vs equity. High debt = higher risk in downturns.
+
Earnings reports — biggest driver of options moves. IV spikes before earnings then collapses (IV crush).
Key event
+
Revenue guidance — forward guidance often moves stocks more than actual results.
Key event
Limitation: Fundamental analysis is slow — a stock can be undervalued for years before the price reflects it. It cannot predict short-term movements.
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Analysis
Quantitative analysis
Quantitative analysis uses math, statistics, and algorithms to evaluate investments — removing emotion from decision making.
The Black-Scholes model — used to price every options contract — is a prime example of quantitative finance.
The Greeks
Delta, Gamma, Theta, Vega
Mathematical measures of how an option responds to price, time, and volatility changes.
Implied volatility
IV percentile
Quants compare current IV to historical IV to determine if options are cheap or expensive.
Expected value
Probability x Payoff
Professional traders only take positive expected-value trades.
Backtesting
Historical testing
Testing a strategy against historical data to verify profitability before risking real money.
Probability of profit
Delta approximates the probability an option expires ITM. A 0.30 delta = ~30% chance of profit at expiry.
Expected move
Options pricing implies a stock's expected move before expiry. If implied move is 5% but you expect 15%, options may be cheap.
Limitation: Models fail when real-world conditions deviate from their assumptions — as seen in the 2008 financial crisis.
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Analysis
Qualitative analysis
Qualitative analysis evaluates non-numerical factors — things you cannot easily put in a spreadsheet — where judgment and context matter as much as numbers.
Investors like Warren Buffett rely on qualitative factors — moats, management, brand — alongside the numbers. Quant tells you what happened; qualitative tells you why.
Proven capital allocators with significant insider ownership. Poor management destroys even great businesses.
Industry position
Market share
Gaining or losing share? A shrinking player in a growing market is a warning sign.
Regulatory risk
Government impact
Tech, healthcare, and energy face regulatory risk that can change a business model overnight.
TechnicalWhat is the price doing? Chart patterns and momentum. Short to medium term.
FundamentalWhat are the numbers saying? Revenue, earnings, balance sheet. Medium to long term.
QuantitativeWhat do the models say? Mathematical, data-driven, emotionless.
QualitativeWhat's the story? Management, brand, moat, narrative. Long-term conviction.
Limitation: Qualitative analysis is subjective — two analysts can reach opposite conclusions from the same facts. Use it for long-term conviction, not timing entries.
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Final Quiz
Test your knowledge
20 questions across all modules. Score 14 or higher to pass.
