What Are Options?
An option is a contract that gives you the right, but not the obligation, to buy or sell a stock at a specific price (strike price) before a specific date (expiration). You pay a premium for this right.
Think of options like insurance. You pay a small premium for the right to take action if certain conditions are met. If they're not, you let the option expire worthless - your maximum loss is the premium paid.
Key Options Terms
Strike Price: The price at which you can buy/sell the stock
Expiration: The last day the option is valid
Premium: The price you pay for the option
Contract: Each option contract controls 100 shares
Call Options vs Put Options
Call Option
A call gives you the right to buy a stock at the strike price. You profit when the stock price rises above your strike price plus premium paid.
- Buy calls when you're bullish
- Max loss = premium paid
- Max profit = unlimited (theoretically)
- Breakeven = strike + premium
Put Option
A put gives you the right to sell a stock at the strike price. You profit when the stock price falls below your strike price minus premium paid.
- Buy puts when you're bearish
- Max loss = premium paid
- Max profit = strike - premium (stock to $0)
- Breakeven = strike - premium
Example: Buying a Call Option
Apple (AAPL) is trading at $180. You buy a call option:
| Strike Price | $185 |
| Expiration | 30 days |
| Premium | $3.00 per share ($300 total) |
| Breakeven | $188 ($185 + $3) |
If AAPL stays at $180: Option expires worthless = -$300 loss (premium paid)
The Greeks Explained
The Greeks measure different dimensions of risk in options positions. Understanding them is essential for managing your trades.
Delta
Price sensitivity. How much the option moves per $1 stock move.
Gamma
Delta's rate of change. How fast delta changes.
Theta
Time decay. How much value lost each day.
Vega
Volatility sensitivity. Impact of volatility changes.
Delta (Δ) - Direction Risk
Delta tells you how much the option price changes for every $1 move in the stock. A call with 0.50 delta moves $0.50 for every $1 the stock moves.
- Calls: Delta ranges from 0 to +1
- Puts: Delta ranges from -1 to 0
- At-the-money options: ~0.50 delta
- Deep in-the-money: ~1.00 delta (moves like stock)
Theta (Θ) - Time Decay
Theta measures how much value the option loses each day. Options are "wasting assets" - they lose value as expiration approaches, especially in the final weeks.
Time Decay Accelerates
An option with 60 days left might lose $0.02/day, but with 10 days left it might lose $0.10/day. The final week is brutal for option buyers. Theta decay is why most option buyers lose money.
Vega (V) - Volatility Impact
Vega measures sensitivity to implied volatility (IV). When IV increases, all options become more valuable (both calls and puts). When IV decreases, options lose value.
How Options Are Priced
Option prices have two components:
- Intrinsic Value: The real value if exercised now (stock price - strike for calls)
- Extrinsic Value: Time value + volatility premium
Out-of-the-money options have zero intrinsic value - you're only paying for time and volatility. As expiration approaches, extrinsic value decays to zero.
Beginner Strategies
1. Covered Calls (Income Generation)
Own 100 shares of a stock, sell a call against them. You collect premium income, but cap your upside if the stock rises above the strike.
Covered Call Example
Own 100 AAPL at $180. Sell a $190 call for $2. If AAPL stays below $190, you keep the $200 premium. If it rises above $190, you sell at $190 + keep premium.
2. Protective Puts (Portfolio Insurance)
Own stock, buy puts to protect against downside. It's like buying insurance on your portfolio.
3. Long Calls (Bullish Leverage)
Buy calls to gain leveraged upside exposure with limited downside (premium paid). Good for high-conviction bullish bets.
Risks & Common Mistakes
Options Can Expire Worthless
About 60-80% of options expire worthless or are closed for a loss. The leverage that makes options attractive also means you can lose 100% of your investment quickly if the trade goes against you.
Common Beginner Mistakes
- Ignoring time decay: Buying options too close to expiration
- Overpaying for volatility: Buying when IV is elevated (before earnings)
- Position sizing: Risking too much on a single trade
- No exit plan: Holding losers hoping for a reversal
- Selling naked options: Unlimited risk strategies without understanding
Frequently Asked Questions
Track Your Options Trades
AllInvestView calculates the Greeks automatically and tracks your options P&L alongside your stock portfolio.
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