1Options Fundamentals
What Are Options?
Options are financial contracts that give you the right (but not the obligation) to buy or sell an underlying asset at a specific price within a certain time frame. Think of them as insurance policies or reservations for stocks.
Call Options
Give you the RIGHT to BUY the stock at the strike price before expiration.
- • Buy when you think stock will go UP
- • Profit from upward price movements
- • Limited risk (premium paid)
- • Unlimited profit potential
Put Options
Give you the RIGHT to SELL the stock at the strike price before expiration.
- • Buy when you think stock will go DOWN
- • Profit from downward price movements
- • Limited risk (premium paid)
- • High profit potential
Key Options Terminology
2The Greeks Explained
Understanding Risk Sensitivities
The Greeks measure how sensitive an option's price is to various factors. Understanding them is crucial for successful options trading and risk management.
Delta
Price sensitivity to underlying stock movement
Gamma
Rate of change of Delta
Theta
Time decay sensitivity
Vega
Volatility sensitivity
Rho
Interest rate sensitivity
Greeks Trading Tips
- • High Delta = More price sensitivity
- • High Gamma = Delta changes quickly
- • Theta decay accelerates near expiration
- • High Vega = More volatility risk
- • Monitor Greeks daily for active positions
- • Use Greeks for position sizing
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3Basic Options Strategies
Interactive Strategy Explorer
Covered Call
Own stock + sell call
Slightly bullish, expecting sideways movement
Strike - Stock Price + Premium
Stock Price - Premium
Beginner-Friendly Strategies
- • Covered Call: Generate income from stocks you own
- • Cash-Secured Put: Get paid to potentially buy stock
- • Long Call: Limited risk way to be bullish
- • Long Put: Limited risk way to be bearish
Strategy Selection Tips
- • Start with simple strategies first
- • Match strategy to market outlook
- • Consider implied volatility levels
- • Always define your risk beforehand
4Intermediate Strategies
Spread Strategies
Vertical Spreads
- • Bull Call Spread: Buy low strike call, sell high strike call
- • Bear Call Spread: Sell low strike call, buy high strike call
Limited risk, limited profit strategies perfect for directional plays
Calendar Spreads
- • Buy longer-term option, sell shorter-term option
- • Same strike price, different expirations
- • Profit from time decay differences
- • Works best with sideways movement
Benefit from time decay while minimizing directional risk
5Advanced Strategies
Complex Multi-Leg Strategies
Iron Condor
Sell OTM call spread + Sell OTM put spread. Profit from low volatility and range-bound movement.
Iron Butterfly
Sell ATM straddle + Buy protective wings. High probability, limited profit strategy.
Ratio Spreads
Uneven number of long vs short options. Can be used for income or directional plays.
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6Risk Management
Essential Risk Rules
Position Sizing
- • Never risk more than 2-5% per trade
- • Size based on maximum loss, not premium
- • Reduce size for complex strategies
- • Account for assignment risk
Time Management
- • Avoid options with less than 30 DTE
- • Close positions at 50% profit
- • Don't hold through earnings (unless planned)
- • Monitor theta decay daily
Exit Strategies
- • Set stop losses before entering
- • Use 2-3x credit received as stop
- • Close spreads before expiration
- • Don't let options expire ITM
Greeks Monitoring
- • Track portfolio Delta daily
- • Manage Vega exposure
- • Be aware of Gamma risk
- • Use position Greeks for sizing
7Common Mistakes to Avoid
Buying Options Right Before Expiration
Theta decay accelerates exponentially in the final weeks
✓ Solution: Buy options with at least 30-45 days to expiration
Ignoring Implied Volatility
High IV means expensive options that may crush after events
✓ Solution: Check IV percentile and avoid buying high IV options
Not Having an Exit Plan
Emotions take over and small losses become large losses
✓ Solution: Set profit targets and stop losses before entering
Overcomplicating Strategies
Complex strategies are harder to manage and understand
✓ Solution: Master simple strategies before moving to complex ones
Trading Illiquid Options
Wide bid-ask spreads make it expensive to enter and exit
✓ Solution: Only trade options with tight spreads and good volume
Master Options Trading - Key Takeaways
Start Simple: Master covered calls and cash-secured puts before moving to complex strategies.
Understand the Greeks: Delta, Gamma, Theta, and Vega control your P&L more than stock price alone.
Manage Risk First: Never risk more than you can afford to lose and always have an exit plan.
Time is Money: Understand how time decay works and use it to your advantage.
IV Matters: Check implied volatility percentile before buying or selling options.
Liquidity is Key: Only trade options with tight bid-ask spreads and sufficient volume.
Practice Paper Trading: Test strategies with virtual money before risking real capital.
Keep Learning: Options trading is complex - continue educating yourself and stay humble.
Continue Your Education
Options Greeks
Deep dive into Delta, Gamma, Theta, Vega, and Rho with examples.
Volatility Trading
Advanced volatility strategies and VIX trading techniques.
Risk Management
Essential risk management principles for all trading strategies.
Options Calculator
Interactive tools for options pricing and Greeks calculation.
Implied Volatility
Understanding IV rank, percentile, and volatility crush.
Technical Analysis
Chart patterns and indicators for better options timing.
Options Trading Checklist
Before Every Trade:
During the Trade:
Options Trading Risk Disclaimer
Options trading involves substantial risk and is not suitable for all investors. Options can expire worthless, and complex strategies may result in significant losses exceeding your initial investment. Assignment risk exists with short options positions. The strategies discussed in this guide are for educational purposes only and should not be considered personalized investment advice. Past performance does not guarantee future results. Options trading requires a solid understanding of the associated risks. Always consult with qualified financial professionals and never risk more than you can afford to lose. Consider your risk tolerance, experience level, and financial situation before implementing any options trading strategy.