Lesson 1: Introduction to Options & Options Essentials

What Are Options?

An option is a financial contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a specific price (strike price) on or before a specific date (expiration date).

Key Characteristics:

• Derivative: Options derive their value from an underlying asset (stocks, ETFs, indices)
• Contract: Each option represents 100 shares of the underlying stock
• Limited Duration: All options have an expiration date
• Asymmetric Risk: Buyers have limited risk, sellers have unlimited risk

The Two Types of Options

1. Call Options

• Give the buyer the right to BUY the underlying asset
• Buyer expects price to RISE
• Seller (writer) must sell if buyer exercises

2. Put Options

• Give the buyer the right to SELL the underlying asset
• Buyer expects price to FALL
• Seller (writer) must buy if buyer exercises

Options Terminology – The Essentials

1. Strike Price

• The price at which the option buyer can buy (call) or sell (put) the underlying asset
• Also called the “exercise price”

2. Expiration Date

• The last day the option can be exercised
• Options expire on the third Friday of the expiration month

3. Premium

• The price paid for the option
• Determined by: intrinsic value + time value + volatility

4. Intrinsic Value

• The “in-the-money” amount of an option
• Call: Current Price – Strike Price (if positive)
• Put: Strike Price – Current Price (if positive)

5. Time Value

• The portion of premium beyond intrinsic value
• Represents the potential for further price movement
• Decreases as expiration approaches (time decay)

6. Moneyness

• In-the-Money (ITM): Has intrinsic value
• At-the-Money (ATM): Strike price equals current price
• Out-of-the-Money (OTM): No intrinsic value

The Options Chain

An options chain is a listing of all available options for a particular stock, organized by expiration date and strike price.

Reading an Options Chain:

Symbol: AAPL (Apple Inc.)
Current Price: $150

**CALL OPTIONS**          **PUT OPTIONS**
Strike | Last | Bid/Ask  Strike | Last | Bid/Ask
140    | 12.50| 12.45/12.55 140   | 1.50 | 1.45/1.55
145    | 8.00 | 7.95/8.05   145   | 3.00 | 2.95/3.05
150    | 4.50 | 4.45/4.55   150   | 5.00 | 4.95/5.05
155    | 2.00 | 1.95/2.05   155   | 8.50 | 8.45/8.55

How Options Are Priced: The Greeks

The “Greeks” measure how options prices change with various factors:

Delta (Δ)

• Measures price change relative to underlying asset
• Call delta: 0 to 1, Put delta: -1 to 0
• Example: Delta of 0.50 means option price moves $0.50 for every $1 stock move

Gamma (Γ)

• Measures rate of change of delta
• Shows how delta changes as stock moves

Theta (Θ)

• Measures time decay
• Negative number showing how much value decreases each day
• Example: Theta of -0.05 means option loses $0.05 per day

Vega (ν)

• Measures sensitivity to volatility
• Shows how price changes with 1% change in implied volatility

Rho (ρ)

• Measures sensitivity to interest rates
• Less important for most retail traders

Practical Exercise

1. Look up options for a stock you’re familiar with
2. Identify one call and one put option at different strike prices
3. Calculate the intrinsic value for each
4. Estimate the time value based on the premium