OPTIONS TRADING FUNDAMENTALS

Master Calls, Puts & The Power of Leverage

WHAT ARE OPTIONS CONTRACTS?

Options Basics

Definition:

• A contract giving you the RIGHT (not obligation)
• To buy or sell stock at a specific price
• Before or on a specific date (expiration)
• You pay a premium for this right

Key Difference from Stocks:

Stocks: You OWN shares forever (until sold)
Options: You have RIGHTS that EXPIRE
• Options have an expiration date
• After expiration, worthless or exercised

Simple Example:

Apple stock = $180 today
You buy: 1 Call option @ $185 strike
Expiration: 30 days from now
Premium paid: $3.50 per share
Total cost: $350 (100 shares per contract)

Scenario 1 - Stock rises to $195:

• Your option is "in the money"
• Intrinsic value: $195 - $185 = $10
• Option worth ~$10+ per share = $1,000+
• Profit: $1,000 - $350 = $650 (186% gain!)

Scenario 2 - Stock stays at $180:

• Your option expires worthless
• No reason to exercise (can buy at $180)
• Loss: $350 (100% of premium paid)

Key Insight:

Limited risk (premium), unlimited potential profit

Calls vs Puts

CALL OPTIONS:

Right to BUY stock at strike price

When to use:

• You're BULLISH (expect price UP)
• Want leverage on upside
• Lower capital than buying stock

Example:

• TSLA @ $250, you buy $260 Call
• Premium: $5 ($500 total)
• TSLA rises to $280
• Call worth $20+ = $2,000+
• Profit: $1,500 (300% gain)

Compare to buying 100 shares:
• Cost: $25,000 (100 x $250)
• Profit at $280: $3,000 (12% gain)
• Options gave 25x more return %!

PUT OPTIONS:

Right to SELL stock at strike price

When to use:

• You're BEARISH (expect price DOWN)
• Want to profit from decline
• Hedge existing stock positions

Example:

• SPY @ $500, you buy $490 Put
• Premium: $4 ($400 total)
• SPY drops to $470
• Put worth $20 = $2,000
• Profit: $1,600 (400% gain)

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OPTIONS TERMINOLOGY - Essential Vocabulary

Core Terms

Strike Price:

• The price at which you can buy/sell
• Fixed when you buy the option
• Example: $150 Call means buy at $150

Premium:

• The PRICE of the option contract
• What you pay to own the option
• Quoted per share (x 100 for total)
• Example: $5 premium = $500 total cost

Expiration Date:

• Last day option can be traded/exercised
• After this, option is worthless or auto-exercised
• Standard: 3rd Friday of month
• Weekly options available too

Contract Size:

• 1 option contract = 100 shares
• Always multiply premium by 100

In The Money (ITM):

Calls: Stock price > Strike price
Puts: Stock price < Strike price
• Has intrinsic value

At The Money (ATM):

Stock price ~ Strike price
• Most liquid options

Out of The Money (OTM):

Calls: Stock price < Strike price
Puts: Stock price > Strike price
• No intrinsic value, all time value

Value Components

Intrinsic Value:

• The "real" value if exercised now

For Calls:

Intrinsic = Stock Price - Strike Price
Example: Stock $155, Strike $150
Intrinsic = $5

For Puts:

Intrinsic = Strike Price - Stock Price
Example: Stock $145, Strike $150
Intrinsic = $5

Extrinsic Value (Time Value):

• Premium above intrinsic value
• Represents potential for profit
• Decays as expiration approaches

Formula:

Premium = Intrinsic + Extrinsic

Example:

• Stock: $155 | Strike: $150 Call
• Premium: $8
• Intrinsic: $5 (155 - 150)
• Extrinsic: $3 (8 - 5)

Moneyness Visual:

OTM - No intrinsic
ATM - At strike
ITM - Has value
For CALLS: Stock below strike | Strike | Stock above strike

Exercise & Assignment

Exercise:

• YOU (option holder) use your right
• Call: Buy shares at strike price
• Put: Sell shares at strike price
• Requires full capital for shares

When to exercise:

• Rarely! Usually better to sell option
• Only if deeply ITM at expiration
• Or for dividend capture

Assignment:

• YOU (option seller) are obligated
• Call: Must SELL shares at strike
• Put: Must BUY shares at strike
• Happens if buyer exercises

Assignment risk:

• Can happen anytime (American style)
• Most common at expiration
• Especially if ITM by $0.01+

Automatic Exercise:

• OCC auto-exercises if ITM $0.01+
• At expiration Friday 5:30pm ET
• Can cause surprise positions!

Best Practice:

• Close options before expiration
• Don't let them expire ITM
• Avoid exercise/assignment surprises
• Manage positions actively

Settlement:

T+1: Exercise/assignment settles next business day

BUYING vs SELLING OPTIONS - Critical Differences

BUYING Options (Long)

What You're Doing:

• Paying premium to own the RIGHT
• No obligation, only opportunity
• You control when to exercise/sell

Advantages:&check; Limited Risk:

• Max loss = premium paid
• Can't lose more than initial cost

&check; Unlimited Profit Potential:

• Calls: Stock can rise infinitely
• Puts: Stock can drop to $0

&check; Leverage:

• Control 100 shares for fraction of cost
• Amplified percentage returns

&check; Defined Timeframe:

• You choose expiration date
• Match to your outlook

Disadvantages:X Time Decay (Theta):

• Option loses value each day
• Working against you

X Need Significant Move:

• Stock must move past breakeven
• Small moves = still lose money

Best for: Directional bets with defined risk

SELLING Options (Short)

What You're Doing:

• Collecting premium from buyer
• Taking on OBLIGATION
• Must fulfill if assigned

Advantages:&check; Collect Premium Immediately:

• Cash in account right away
• Yours to keep if expires worthless

&check; Time Decay Works For You:

• Option loses value daily
• You profit as it decays

&check; High Win Rate:

• 60-70% of options expire worthless
• Probability on your side

Disadvantages:X Limited Profit:

• Max gain = premium collected
• Capped upside

X Unlimited Risk (Naked):

• Naked calls: Theoretically infinite
• Naked puts: Stock to $0
• Can lose WAY more than premium

X Margin Requirements:

• Must maintain collateral
• Ties up significant capital

Best for: Income generation, covered strategies

WHAT DETERMINES OPTION PRICES?

Key Factors

1. Stock Price vs Strike:

• Most important factor
• ITM options cost more
• OTM options cost less

Example:

Stock at $150:
• $140 Call = $12 (ITM)
• $150 Call = $5 (ATM)
• $160 Call = $1 (OTM)

2. Time Until Expiration:

• More time = higher premium
• More opportunity for movement

Example (same strike):

• 7 days to expiration: $2
• 30 days to expiration: $5
• 90 days to expiration: $8

3. Implied Volatility (IV):

• Market's expectation of movement
• Higher IV = higher premiums
• Lower IV = lower premiums

Typical IV ranges:

• Blue chip stocks: 15-30%
• Tech/growth: 40-70%
• Meme stocks: 100-300%+

4. Interest Rates:

• Minor impact (usually)
• Higher rates = calls worth more

5. Dividends:

• Affects call/put parity
• Calls less valuable before ex-dividend

Black-Scholes Model

The Formula (Overview):

• Mathematical model for option pricing
• Won Nobel Prize in Economics (1997)
• Used by traders worldwide

Inputs Required:

1. Current stock price
2. Strike price
3. Time to expiration
4. Risk-free interest rate
5. Implied volatility (most critical)

What It Calculates:

• "Fair value" of option
• Based on probability
• Theoretical price

Real World vs Model:

• Actual prices can differ
• Supply/demand affects pricing
• Market makers use adjustments

Implied Volatility Deep Dive:

• THE most important variable
• It's "implied" from option prices
• Not the same as historical volatility

High IV periods:

• Earnings announcements
• Major news events
• Market uncertainty/crashes
• Option premiums are EXPENSIVE

Low IV periods:

• Calm, trending markets
• Option premiums are CHEAP

Pricing Examples

Example 1: ATM Call

Stock: $100
Strike: $100 Call
DTE: 30 days
IV: 30%
Premium: ~$3.50

Breakdown:

• Intrinsic: $0 (ATM)
• Extrinsic: $3.50 (all time value)

Example 2: ITM Call

Stock: $110
Strike: $100 Call
DTE: 30 days
IV: 30%
Premium: ~$13.50

Breakdown:

• Intrinsic: $10 (110 - 100)
• Extrinsic: $3.50 (time value)

Example 3: OTM Call

Stock: $100
Strike: $110 Call
DTE: 30 days
IV: 30%
Premium: ~$1.20

Breakdown:

• Intrinsic: $0 (OTM)
• Extrinsic: $1.20 (less time value)

Key Observation:

• ATM has most extrinsic value
• Deep ITM/OTM have less
• Trade-off: probability vs leverage

OPTIONS STRATEGIES - The Four Categories

Bullish Strategies

1. Long Call (Covered in Detail File 2):

• Buy call option
• Max loss: Premium paid
• Max gain: Unlimited
• Best for: Strong bullish outlook

2. Bull Call Spread:

• Buy lower strike call
• Sell higher strike call
• Max loss: Net debit
• Max gain: Spread width - debit
• Best for: Moderate bullish outlook

3. Cash-Secured Put:

• Sell put with cash backing
• Collect premium
• Willing to buy stock at strike
• Best for: Want to own stock cheaper

4. Covered Call:

• Own 100 shares
• Sell call against them
• Collect premium as income
• Best for: Generate income on holdings

When to Use Bullish Strategies:

• Expect stock to rise

Bearish & Neutral Strategies

BEARISH Strategies:1. Long Put:

• Buy put option
• Profit from stock decline
• Max loss: Premium paid

2. Bear Put Spread:

• Buy higher strike put
• Sell lower strike put
• Defined risk & reward

NEUTRAL Strategies:1. Iron Condor:

• Sell OTM call & put
• Buy further OTM call & put
• Profit if stock stays in range

2. Butterfly Spread:

• Three strikes, same expiration
• Profit at middle strike

3. Short Straddle:

• Sell ATM call & put
• Profit from low volatility
• Unlimited risk both directions!

CRITICAL RISK WARNINGS

Options Expire Worthless: 60-70% of options expire worthless. Buying options = you're fighting time decay every single day. The clock is always ticking against you.
100% Loss Is Common: Unlike stocks, options can (and often do) go to $0. Every dollar of premium can vanish. This is NOT like holding stock where you always own something.
Selling Naked = Unlimited Risk: Selling uncovered calls or puts can result in losses FAR exceeding your account. One bad trade can bankrupt you. NEVER sell naked without full understanding.
Leverage Cuts Both Ways: Yes, you can make 200% in a day. You can also lose 100% in a day. Options amplify BOTH gains and losses. Most beginners focus only on the gain side.
Assignment Can Surprise You: If you sell options, you CAN be assigned at any time. Waking up to 100 shares you didn't want (or can't afford) is a real risk. Manage positions actively.
Complexity != Better: Multi-leg strategies look sophisticated but add execution risk, commissions, and complexity. Master simple strategies first. Iron condors can blow up accounts just as easily as naked options.
Options Are NOT Investments: They're speculative instruments with expiration dates. Don't treat your retirement account like a casino. If you can't afford to lose the premium, don't buy the option.
Start Small Or Blow Up: Paper trade for 3+ months. Then trade 1 contract at a time. Scale slowly. The #1 mistake is going too big too fast. Options will humble you. Respect them.

Options offer incredible opportunity - and incredible risk. Education before execution. Always. - TradeHive

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OPTIONS TRADING DISCLAIMER

Options trading involves substantial risk of loss and is not suitable for all investors. You can lose 100% of your premium and potentially more if selling options. Past performance is not indicative of future results. Options are complex instruments requiring specialized knowledge - do not trade them based solely on this introductory guide. Examples provided are for educational illustration only and do not constitute recommendations. Actual option prices, Greeks, and strategies will vary significantly from examples shown. Time decay, volatility changes, and other factors can cause rapid losses. Assignment and exercise can occur at any time and may result in positions you cannot afford. Selling naked options can result in unlimited losses. Margin requirements and account minimums vary by broker. Most options expire worthless - this is a statistical fact. Success rates are extremely low for beginners. The Black-Scholes model is theoretical and may not reflect actual market prices. Implied volatility is not a prediction of future movement. This material is for educational purposes only and does not constitute trading advice or recommendations. Options trading requires approval from your broker based on experience and financial situation. Paper trading success does not guarantee live trading success. Consult licensed financial professionals before trading options. TradeHive and its affiliates are not liable for trading losses. You trade at your own risk. Only trade with risk capital you can afford to lose entirely.