💡 Core Insight
Options are contracts that give you the right — not the obligation — to buy or sell an asset at a specific price before a set date.
Used wisely, they can:
- Protect investments (hedging)
- Generate income through premiums
- Amplify returns through leverage
📘 What Is Options Trading?
- Options are derivatives — their value is based on an underlying asset (like a stock).
- Each contract controls 100 shares of the underlying stock.
- You pay a premium for the right to buy or sell before expiration.
- They’re powerful tools for hedging, speculation, or income generation.
| Term | Definition | Example |
|---|
| Underlying Asset | Security linked to the option | Apple stock (AAPL) |
| Contract Size | Number of shares per option | 100 shares |
| Premium | Price paid for the option | $2.00 × 100 = $200 |
| Expiration | When the contract ends | Third Friday of each month |
⚖️ Call vs. Put Options
- Call Option: Gives you the right to buy at the strike price — useful when you expect prices to rise.
- Put Option: Gives you the right to sell at the strike price — useful when you expect prices to fall.
- Calls = bullish strategy.
- Puts = bearish strategy.
| Type | Right | Used When | Goal |
|---|
| Call Option | Buy | Expect prices to go up | Profit from upward moves |
| Put Option | Sell | Expect prices to go down | Profit or protect from declines |
🧮 Key Terms to Remember
- Strike Price: Price at which you can buy or sell the underlying asset.
- Premium: What you pay to enter the contract.
- Expiration Date: Deadline to exercise the option.
- Intrinsic Value: Real profit if exercised now.
- Time Value: Extra value due to remaining time.
| Term | Meaning | Investor Tip |
|---|
| Strike Price | Execution price | Choose near current market price |
| Premium | Contract cost | Lower premium = higher leverage risk |
| Expiration Date | Option lifespan | Shorter = cheaper but riskier |
| Intrinsic Value | In-the-money amount | Track for profit/loss insight |
🎯 Core Trading Strategies
- Covered Call: Sell calls on stocks you own to earn income.
- Protective Put: Buy puts on stocks you own to protect downside.
- Straddle: Buy a call and a put at the same strike — profits from volatility.
- Iron Condor: Combine multiple options to profit in flat markets.
| Strategy | Market View | Risk Level | Best For |
|---|
| Covered Call | Neutral to mildly bullish | Low | Income generation |
| Protective Put | Bullish with protection | Moderate | Hedging long positions |
| Straddle | Volatile | High | Event-driven trades |
| Iron Condor | Sideways | Low–Moderate | Range trading |
⚠️ Major Risks & Considerations
- Leverage Risk: Small price changes can cause big gains or losses.
- Time Decay: Options lose value daily as expiration nears.
- Volatility: Increases premium cost but adds unpredictability.
- Liquidity: Some options have low volume, affecting exits.
| Risk | Impact | Mitigation |
|---|
| Leverage | Magnified losses | Use small position sizes |
| Time Decay | Value erosion over time | Trade shorter-term events |
| Volatility | Unstable pricing | Trade around earnings carefully |
🧩 Practical Tools & Platforms
- Options Calculators: Estimate fair value using models like Black-Scholes.
- Brokerage Platforms: Trade directly on systems like TD Ameritrade or Interactive Brokers.
- Market Data Tools: Track implied volatility and open interest.
- Education Hubs: Learn with Investopedia, CBOE, or brokerage tutorials.
| Tool | Purpose |
|---|
| CBOE Options Calculator | Price and risk modeling |
| TD Ameritrade Thinkorswim | Visual options analysis |
| Investopedia Simulator | Practice without real risk |
✅ Final Checklist
- Master how calls and puts work.
- Start small — paper trade first.
- Focus on time and volatility management.
- Use defined-risk strategies (covered calls, spreads).
- Review trades weekly for performance and risk balance.
