Options Trading Summary
A condensed overview of options trading as covered in this repository (concepts and book notes). For full book notes and strategy detail, see Options Trading and Book Notes.
1. What Are Options?
Definition: Call = right (not obligation for buyer) to buy the underlying at the strike by expiration. Put = right to sell at the strike by expiration. Buyer pays premium; seller receives premium and takes the other side of the obligation (if assigned).
Key terms:
Strike: Price at which the option can be exercised.
Expiration: Date after which the option expires (American = exercise any time before; European = only at expiration).
Premium: Price paid/received for the option (intrinsic + time value).
In-the-money (ITM): Call when underlying > strike; Put when underlying < strike. At-the-money (ATM): Underlying ≈ strike. Out-of-the-money (OTM): Call when underlying < strike; Put when underlying > strike.
2. Option Payoffs (Long vs Short)
Long call: Profit when underlying rises above strike + premium paid. Max loss = premium. Unlimited upside potential.
Long put: Profit when underlying falls below strike − premium paid. Max loss = premium. Max gain when underlying → 0.
Short call: Collect premium; max gain = premium. Loss when underlying rises (unlimited unless covered).
Short put: Collect premium; max gain = premium. Loss when underlying falls (down to zero).
Rule of thumb: Long options = limited risk (premium), positive theta (time decay hurts). Short options = premium income, negative theta (time decay helps), but margin and assignment risk.
3. The Greeks
Delta
Rate of change of option price vs underlying. Call 0–1; Put 0 to −1.
Approx. probability of ITM; hedge ratio (e.g. 50 delta ≈ 0.5 shares per contract).
Gamma
Rate of change of delta vs underlying.
High near ATM; short options = negative gamma (losses accelerate when wrong).
Theta
Time decay (option value loss per day).
Long options lose theta; short options gain theta. Manage holding period.
Vega
Sensitivity to implied volatility (IV).
Long options = long vega (benefit from IV rise); short options = short vega.
Simplified: Delta = direction; Theta = time; Vega = volatility. Use Greeks to size, hedge, and choose expiration/strike.
4. Implied Volatility (IV) vs Historical Volatility (HV)
Historical volatility (HV): Realized volatility of the underlying (e.g. annualized standard deviation of returns). Backward-looking.
Implied volatility (IV): Volatility implied by option prices (e.g. from Black-Scholes). Forward-looking; reflects market expectation and supply/demand for options.
Use: Sell premium (e.g. sell puts/calls or spreads) when IV is high (rich options); buy options when IV is low (cheap) if you expect a move. Compare IV to HV and to own estimate of future volatility.
5. Basic Strategies (Overview)
Long call
Bullish
Premium
Unlimited
Leveraged upside
Long put
Bearish
Premium
Strike − premium
Leveraged downside / hedge
Covered call
Neutral to bullish
Stock decline (minus call premium)
Premium + (cap − stock cost)
Income on owned stock
Protective put
Own stock, fear drop
Premium + (stock decline to strike)
Limits downside
Insurance
Bull call spread
Bullish
Net debit
(Spread width − debit)
Cheaper than long call; cap upside
Bear put spread
Bearish
Net debit
(Spread width − debit)
Cheaper than long put; cap upside
Straddle (long)
Big move either way
Debit
Large if move > debit
Volatility / event
Strangle (long)
Big move; cheaper than straddle
Debit
Large if move > debit
Volatility; lower cost
Iron condor
Range-bound
Width of one side − credit
Credit
Premium in sideways market
6. Risk and Position Management
Assignment: Short option can be assigned (call → sell stock; put → buy stock). Manage before expiration if you don’t want assignment (close or roll).
Margin: Short options require margin. Naked short calls = very high risk; use spreads or covered structures to define risk.
Position sizing: Size by max loss (e.g. spread width or premium paid). Don’t over-concentrate in single name or expiration.
Expiration: Avoid holding short options through expiration unless you are prepared to be assigned or take delivery.
7. How Options Fit With TA and FA
FA: Underlying selection (what to buy/sell). Options express that view (e.g. long call on undervalued stock) or hedge (e.g. protective put).
TA: Timing (when to open/close). Enter options when TA suggests entry; choose expiration and strike based on expected move and time horizon. Use TA for stop/target on the underlying.
Combined: FA for conviction; TA for entry/exit; options for leverage, income, or defined risk.
8. Book Notes in This Repo
Options as a Strategic Investment — Full strategies and applications.
The Options Playbook — Beginner-friendly playbook of strategies.
Trading Options Greeks — Greeks in depth for risk and optimization.
Options Volatility and Pricing — Pricing and volatility (Natenberg).
The Bible of Options Strategies — 60+ strategies reference.
Option Volatility and Pricing Strategies (Sinclair) — Quant/volatility focus.
Options Made Easy — Basics for beginners.
The Complete Guide to Option Strategies — Strategy reference.
Links: Options Trading README | Book Notes
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