Options are financial derivatives that give the buyer the right, but not the obligation, to buy (call) or sell (put) an underlying asset at a specified price within a certain time frame.
Call vs Put Options
Call Option
Right to buy the underlying asset at strike price
Bullish strategy
Profit when asset price rises above strike + premium
Put Option
Right to sell the underlying asset at strike price
Bearish strategy
Profit when asset price falls below strike - premium
Key Terms
Strike Price: Price at which the option can be exercised
Premium: Price paid for the option
Expiration Date: When the option expires
In-the-Money (ITM): Option has intrinsic value
Out-of-the-Money (OTM): Option has no intrinsic value
At-the-Money (ATM): Strike equals current price
Option Strategies
Own the stock and sell call options against it.
Generate income from premium
Limited upside potential
Used when expecting moderate price movement
Own the stock and buy put options for downside protection.
Hedge against downside risk
Unlimited upside potential
Cost is the premium paid
Buy both call and put at same strike price.
Profit from big price moves in either direction
High premium cost
Used when expecting volatility
Greeks
Options pricing factors that affect option value:
Delta: Rate of change of option price with respect to underlying price
Gamma: Rate of change of delta
Theta: Time decay
Vega: Sensitivity to volatility
Rho: Sensitivity to interest rates
Risk Warning: Options trading can result in total loss of investment. Options are complex instruments and may not be suitable for all investors.
Example Trade
Stock XYZ trading at $100. You buy a call option with strike $105 for $2 premium:
If XYZ rises to $110: Option worth $5, profit = $3 (minus premium)
If XYZ stays at $100: Option expires worthless, loss = $2 premium