Options Foundations

An option is a contract that gives you the right, but not the obligation, to buy or sell 100 shares at a set price before a set date. Here is what that really means.

A call option gives you the right to buy 100 shares at a set price. Learn how a long call makes and loses money, and how to find its break-even price.

A put option gives you the right to sell 100 shares at a set price. Learn how a long put profits when a stock falls, and how puts are used as insurance.

Every option has a buyer who pays for a right and a seller who is paid to take on an obligation. Learn how each side makes money and where the real risk sits.

Traders use options for three main reasons - to speculate with defined risk, to generate income, and to protect positions. Here is how each works and what it costs.

The strike price is the fixed price at which an option lets you buy or sell the underlying shares. Learn how strikes are listed and how the strike you pick changes a trade.

Every option has an expiration date, the last day its right exists. Learn when monthly, weekly and daily options expire, and what happens on the last trading day.

The premium is the price of an option. Learn how premiums are quoted per share, which side of the quote you pay, and how to turn a quote into the real cost of a trade.

One standard option covers 100 shares, but stock splits, mergers and special dividends can change that. Learn how the multiplier works and how adjusted contracts differ.

Moneyness describes where the stock price sits against an option's strike. Learn what in the money, at the money and out of the money mean for calls and puts.

An options chain lists every call and put on a stock for one expiration, with strikes down the middle. Learn how it is laid out and how to find one contract.

The bid is what buyers will pay, the ask is what sellers want, and the gap between them is a real cost. Learn to read bid, ask, last and mark on any option quote.

Volume counts contracts traded today; open interest counts contracts still open. Learn what each measures, how they change, and how to use both to judge liquidity.

Your strike and expiration should come from your view of the stock - how far and by when. Learn to compare strikes and expirations on the chain using cost and break-even.

Copy a bought call from the options chain into the free profit calculator and read its expiration payoff, maximum loss and break-even before you trade.

The option Greeks measure how an option's price responds to the stock, to time and to volatility. See what delta, gamma, theta and vega mean, with worked numbers.

Delta tells you how much an option's price moves for each $1 move in the stock. Learn to read call and put delta, and why delta is only a rough probability.

Gamma measures how fast an option's delta changes as the stock moves. See why gamma helps option buyers, hurts sellers, and jumps as expiration approaches.

Theta measures how much value an option loses each day as expiration approaches. See theta decay in dollars, why it speeds up, and why sellers like it.

Vega measures how much an option's price changes when implied volatility moves one point. See vega in dollars, what a drop in implied volatility costs, and which options it hits hardest.

Every option premium splits into intrinsic value, what it would be worth if exercised now, and extrinsic (time) value, the rest. Learn to calculate both.

An option's price depends on six inputs - stock price, strike, time, implied volatility, interest rates and dividends. See how each one moves calls and puts.

Implied volatility is the market's estimate of how much a stock will move, read from option prices. Learn what it means and how it differs from historical volatility.

IV crush is the sharp drop in implied volatility after an event such as earnings. See why it can make an option lose value even when the stock moves your way.

IV rank and IV percentile compare a stock's implied volatility today with its own past year. Learn how each is calculated and why the two can disagree.

Before you can place an options trade, your broker must approve your account. Learn what firms ask and how to check which strategies your approval permits.

Buy to open, sell to close, sell to open and buy to close tell your broker whether an options order starts a position or ends one. Here is how each works on a real order ticket.

A market order fills fast at whatever price is available; a limit order protects your price but may not fill. Learn why the bid-ask spread makes that choice matter more for options.

Rolling an option closes your current contract and opens a new one with a later expiration, a different strike, or both. Learn when traders close, roll or hold, and what each choice costs.

Standard stock options usually expire worthless out of the money or are exercised in the money, but instructions can change that. Learn about exercise, assignment and pin risk.

Position sizing decides how many contracts to trade so that a trade's worst case costs only a small, preset share of your account. Here is the math, with worked numbers.

A trading plan writes down, before you trade, what you trade, how much you risk and exactly when you enter and exit. Here is what goes in one, with a filled-in example.

Trading psychology is how fear, greed, regret and pride can push traders to break their own rules. Here are three recurring traps, what they cost in numbers, and how to guard against them.

A cash account requires full payment without borrowing; a margin account lets you borrow from your broker. Here is how each works for options and the rules that apply to both.

An options trading journal records every trade's numbers and the reasons behind it, so you can learn from your own results. Here is what to record, a template, and a review routine.