Options Trading 101: The Basics

Dive into the basics of options trading, master essential terminology, and learn about legal disclosures and educational purposes to trade responsibly.

Options unlock versatile strategies that hedge risk, leverage positions, and shape profit probability through volatility and time decay, offering higher potential rewards with controlled risk compared to stocks.

Define an option as a contract that gives the buyer the right, not the obligation, to buy or sell underlying asset via calls and puts at strike price before expiration.

Options are classified as in the money, at the money, or out of the money by comparing the stock price to the strike price for calls and puts.

Learn how to close an option position by offsetting, selling or buying back options, or letting them expire. Understand exercise, assignment, and auto-exercise rules for calls and puts.

Open interest tracks outstanding option contracts by strike and expiration, rising when positions are opened and falling when closed, while real-time volume shows traded contracts; together they gauge liquidity.

Understand how option premium equals intrinsic plus extrinsic value, shaped by time decay (theta) and implied volatility (Veiga), with buyers paying a debit and sellers a credit on 100 shares.

Explore theta, the time decay rate that erodes option value. Short options gain as expiration nears, while long options lose; out-of-the-money options decay fastest in the last 30-60 days.

Discover how implied volatility quantifies market expectations and sets option prices. Map a stock's expected range and probabilities for reaching different strikes while signaling risk and fear.

Explore an Apple option contract, with a $140 strike, a March expiration, and a $1.33 premium for 100 shares, while the option chain shows in the money calls and puts.

Sell options to exploit time decay and odds that favor net sellers. You can profit even if the market moves sideways or against you, as theta erodes value.