Covered in The Option Advantage · Module 2 · The building blocks
Calls and puts
A call gives the right to buy 100 shares at the strike price before expiration. A put gives the right to sell. Sellers (writers) of each carry the matching obligation: a short call may have to sell shares, a short put may have to buy them.
Premium = intrinsic + time value
Intrinsic value is how far in the money an option is (a $100 stock makes a $95 call worth $5 intrinsic). Everything else is extrinsic, or time value — the price of what could still happen. Out-of-the-money options are all time value, and more time means a higher price.
The Greeks in one line each
Delta: how much the option moves per $1 in the stock. Theta: value lost each day to time. Vega: sensitivity to implied volatility (IV). Gamma: how fast delta changes. High IV makes options expensive for buyers and attractive for sellers.
Covered calls and spreads
A covered call collects premium on shares you own in exchange for giving up gains above the strike. A vertical spread buys one strike and sells another, so it costs less and caps both the best and worst case — defined risk you can size before you enter.
How positions close
Most options are never exercised. Traders close by trading the contract back, or roll it — closing one contract and opening another at a different strike or expiry.
Common mistakes
- Treating options as cheap stock — a small premium can still go to zero.
- Buying far out-of-the-money calls that need a huge move just to break even.
- Ignoring IV before earnings, then losing money even when the stock moves your way.
- Selling puts on a stock you would not actually want to own.