Complete Options Guide: Calls, Puts & Greeks
Master options trading with calls, puts, Greeks, and risk management. Requires significant trading experience and risk capital.
🎯 What Are Options?
Options are contracts that give you the right (but not obligation) to buy or sell an asset at a specific price within a certain timeframe. Think of it like a reservation system for stocks.
⚠️ Essential Knowledge
- Assignment Risk: Option sellers can be assigned at any time and forced to deliver shares
- PDT Rules: Pattern Day Trading rules apply - need $25,000 to day trade options
- Time Decay: Options lose value daily as expiration approaches
📞 Call Options
The right to BUY a stock at a specific price
💡 Example:
Buy a call option for Apple at $150. If Apple goes to $160, you can still buy at $150 and profit $10 per share.
📉 Put Options
The right to SELL a stock at a specific price
💡 Example:
Buy a put option for Apple at $150. If Apple drops to $140, you can still sell at $150 and profit $10 per share.
🔍 Key Options Terms
Strike Price
The price at which you can buy/sell the stock
Expiration Date
When the option contract expires
Premium
The cost to buy the option
Exercise
Actually using your right to buy/sell
📈 Profit/Loss Visualization
📝 Note: This shows intrinsic value only. Real options have time value that decays!
💰 Basic Options Strategies
📈 Long Call (Bullish)
BullishWhen to use: You think a stock will go UP
Max Risk: Premium paid
Max Reward: Unlimited
Example:
Apple at $150 → Buy $155 call for $2
If Apple hits $160: Profit = $160 - $155 - $2 = $3 per share
📉 Long Put (Bearish)
BearishWhen to use: You think a stock will go DOWN
Max Risk: Premium paid
Max Reward: Strike price - premium
Example:
Apple at $150 → Buy $145 put for $3
If Apple drops to $135: Profit = $145 - $135 - $3 = $7 per share
🛡️ Covered Call (Income)
IncomeWhen to use: You own 100 shares and want extra income
Risk: Limited upside if stock rises a lot
Example:
Own 100 Apple shares at $150 → Sell $160 call for $2
Collect $200 premium, but shares get called away if Apple > $160
🔤 The Greeks (Simplified for Beginners)
The "Greeks" are measurements that help you understand how option prices change. You don't need to master these to start, but understanding the basics helps.
Δ Delta
What: Price change per $1 stock move
Example: Delta 0.50 means option gains $0.50 if stock rises $1
Θ Theta
What: Value lost per day from time decay
Example: Theta -0.05 means losing $5/day per contract
Γ Gamma
What: How fast Delta changes as stock moves
Example: Higher gamma = Delta changes more rapidly
V Vega
What: Price change per 1% volatility change
Example: Vega 0.15 means +$15 if volatility rises 1%
💡 Focus on Delta & Theta first - these impact your trades the most!
⏰ Option Pricing: Intrinsic vs Time Value
Every option's price has two components. Understanding this is critical to avoid losing money to time decay.
1️⃣ Intrinsic Value
The real, immediate value if exercised today
Calls: Max(0, Stock Price - Strike Price)
Puts: Max(0, Strike Price - Stock Price)
Example:
Stock at $150, $145 call → Intrinsic value = $150 - $145 = $5
2️⃣ Time Value (Extrinsic Value)
The "hope" premium—what you pay for potential future gains
Formula: Option Premium - Intrinsic Value
Example:
$145 call trading at $8
Intrinsic = $5, Time value = $8 - $5 = $3
⚠️ This $3 decays to $0 by expiration!
📉 Time Value Decay Accelerates
Time value doesn't decay linearly—it speeds up as expiration approaches:
- 90 days out: Slow decay (~20% of time value lost)
- 30 days out: Moderate decay (~40% of remaining time value)
- 7 days out: Rapid decay (~70% of remaining time value)
- Final day: Time value collapses to zero
💡 Pro Tip: Avoid buying options with less than 30 days to expiration unless you have a specific catalyst (like earnings) in mind.
📊 Implied Volatility (IV) - The Hidden Cost
IV is the market's expectation of future volatility. It directly affects option prices and is one of the main reasons traders lose money.
What is IV?
High IV = Options are expensive (market expects big moves)
Low IV = Options are cheap (market expects stability)
🚫 The IV Crush Trap
Most Common Beginner Mistake:
❌ What Happens:
- Buy calls before earnings announcement (IV = 80%)
- Stock moves up 5% (you were right!)
- But your option LOSES money 📉
Why? After earnings, IV crashes from 80% to 30%. The IV drop wipes out more value than the stock gain added.
💡 IV Trading Rules
- High IV (> 50%): Good time to SELL options, bad time to BUY
- Low IV (< 20%): Good time to BUY options, bad time to SELL
- Before Earnings: IV spikes—avoid buying unless you plan to exit before announcement
- After Earnings: IV collapses—existing option holders get crushed
🎓 Advanced Trader's Options Checklist
Before Trading Options:
Ready to trade? Only start with real money after 100+ profitable paper trades over at least 3 months.
📊 Understanding Option Chains
Learn how to read and analyze real option chains like professional traders
Apple (AAPL) Call Options Example
Stock Price: $150.00 | 30 days to expiration
| Strike | Bid | Ask | Volume | Open Interest | IV% | Analysis |
|---|---|---|---|---|---|---|
| $145 | $7.20 | $7.35 | 1,234 | 5,678 | 32% | In-the-Money |
| $150 | $3.45 | $3.55 | 8,901 | 12,345 | 35% | At-the-Money |
| $155 | $1.20 | $1.25 | 3,456 | 7,890 | 38% | Out-of-Money |
| $160 | $0.45 | $0.50 | 892 | 2,134 | 42% | Deep OTM |
💡 Key Insights from this Option Chain:
- Highest Volume: $150 strike (ATM) - indicates most trader interest
- Liquidity: Tight bid-ask spreads on popular strikes
- Implied Volatility: Higher IV for OTM options (volatility smile effect)
- Risk/Reward: ITM = higher cost, higher probability | OTM = lower cost, lower probability
🎯 Strategy Selection Matrix
| Market Outlook | Strategy | Risk Level | Best For | Example |
|---|---|---|---|---|
| 🚀 Very Bullish | Long Call | High | Big moves up | Buy $150 call for $3.50 |
| 📈 Moderately Bullish | Bull Call Spread | Medium | Steady rise | Buy $150/$155 spread |
| 📉 Bearish | Long Put | High | Market drops | Buy $145 put for $2.80 |
| 😴 Neutral/Sideways | Iron Condor | Medium | Range-bound | Complex 4-leg strategy |