Options Trading
Master the art of options trading with leverage and defined risk
Options Fundamentals
Call Option
Right to buy an asset at a specific price before expiration
Example: Buy AAPL $150 call - profit if stock rises above $150 + premium
Put Option
Right to sell an asset at a specific price before expiration
Example: Buy SPY $400 put - profit if index falls below $400 - premium
Strike Price
Price at which option can be exercised
Example: A $100 strike call allows buying shares at $100
Premium
Price paid for the option contract
Example: $2.50 premium = $250 for one contract (100 shares)
Expiration Date
Last day option can be exercised
Example: Third Friday of expiration month for monthly options
Intrinsic Value
Amount option is in-the-money
Example: Stock at $105, $100 call has $5 intrinsic value
Time Value
Premium above intrinsic value
Example: Total premium - intrinsic value = time value
Assignment
When option seller must fulfill obligation
Example: Short call assigned = must sell shares at strike
The Greeks - Risk Metrics
Delta (Δ)
Price change sensitivityRange: Calls: 0 to 1, Puts: 0 to -1
Example: 0.50 delta = $0.50 move per $1 stock move
Used for: Hedge ratio, probability ITM
Gamma (Γ)
Rate of delta changeRange: Always positive
Example: 0.05 gamma = delta changes by 0.05
Used for: Risk of large moves
Theta (Θ)
Time decayRange: Usually negative for buyers
Example: -0.05 theta = lose $5/day
Used for: Time decay management
Vega (ν)
Volatility sensitivityRange: Positive for long options
Example: 0.10 vega = $10 per 1% IV change
Used for: Volatility exposure
Rho (ρ)
Interest rate sensitivityRange: Calls positive, puts negative
Example: 0.05 rho = $5 per 1% rate change
Used for: Less important for short-term
Popular Options Strategies
Covered Call
IncomeSetup: Long stock + short call
Best For: Neutral to mildly bullish
Max Profit: Premium + limited upside
Max Loss: Stock decline - premium
Protective Put
HedgeSetup: Long stock + long put
Best For: Protecting gains
Max Profit: Unlimited upside
Max Loss: Limited to put strike
Bull Call Spread
DirectionalSetup: Buy call + sell higher call
Best For: Moderately bullish
Max Profit: Limited to spread width
Max Loss: Limited to net debit
Bear Put Spread
DirectionalSetup: Buy put + sell lower put
Best For: Moderately bearish
Max Profit: Limited to spread width
Max Loss: Limited to net debit
Iron Condor
NeutralSetup: Bull put spread + bear call spread
Best For: Low volatility expectation
Max Profit: Net credit received
Max Loss: Spread width - credit
Straddle
VolatilitySetup: Buy call + put same strike
Best For: Expecting big move
Max Profit: Large move either direction
Max Loss: Limited to premium paid
Butterfly
NeutralSetup: Buy 1, sell 2, buy 1
Best For: Pinning price target
Max Profit: Stock at middle strike
Max Loss: Limited to net debit
Calendar Spread
TimeSetup: Sell near, buy far expiration
Best For: Sideways movement
Max Profit: Time decay differential
Max Loss: Limited to net debit
Types of Options
American Options
- Exercise: Any time before expiration
- Premium: Higher due to flexibility
- Common: Stock options
European Options
- Exercise: Only at expiration
- Premium: Lower than American
- Common: Index options
Weekly Options
- Exercise: Expire every Friday
- Premium: High theta decay
- Common: Popular stocks/ETFs
LEAPS
- Exercise: Long-term (1-3 years)
- Premium: Higher time value
- Common: Stock replacement strategy
Options Risk Management
Key Risks
- • Time Decay: Options lose value over time
- • Volatility Risk: IV changes affect premium
- • Assignment Risk: Early exercise for shorts
- • Liquidity Risk: Wide bid-ask spreads
- • Leverage Risk: Losses can be rapid
Risk Rules
- • Never risk more than 2-5% per trade
- • Understand max loss before entry
- • Use stop losses on directional trades
- • Manage position size carefully
- • Close losing trades at -50% loss
Reading Options Chains
Key Information in Options Chain
Calls Side (Left)
- • Bid/Ask prices
- • Last traded price
- • Volume and open interest
- • Implied volatility
Puts Side (Right)
- • Same metrics as calls
- • Strike prices in center
- • ITM/OTM highlighting
- • Greeks if available
Getting Started with Options
1. Education
Learn basics, Greeks, and strategies before trading
2. Paper Trade
Practice with virtual money to understand mechanics
3. Start Small
Begin with basic strategies and small positions
Most Traded Options
Index Options
- • SPY: S&P 500 ETF options
- • QQQ: Nasdaq 100 ETF options
- • IWM: Russell 2000 ETF options
- • SPX: S&P 500 Index options (cash-settled)
- • VIX: Volatility Index options
Stock Options
- • AAPL: Apple Inc.
- • TSLA: Tesla Inc.
- • NVDA: Nvidia Corp.
- • AMZN: Amazon.com
- • META: Meta Platforms
Options Trading Tools
Options Trading Tips
Do's
- ✓ Start with buying options
- ✓ Focus on liquid underlyings
- ✓ Understand time decay
- ✓ Use proper position sizing
- ✓ Have an exit plan
Don'ts
- ✗ Sell naked options as beginner
- ✗ Trade illiquid options
- ✗ Hold to expiration always
- ✗ Ignore the Greeks
- ✗ Overtrade or revenge trade