What is Options

Options are contracts that give you the right (not the obligation) to buy or sell shares at a set price by a set date.

How options work (the basics)

• Each contract usually controls 100 shares. If an option is priced at $2.50, the contract costs about $250.

• Calls profit when the underlying rises above your strike; puts profit when it falls below your strike.

• Option price = intrinsic value (in-the-money amount) + extrinsic value (time + volatility).

• OTM options are cheaper but decay faster; ITM options move more like the stock.

The Greeks (the 3 you must know)

• Delta: how much the option price changes for a $1 move in the underlying (also a rough ‘probability’ of finishing ITM).

• Theta: time decay, how much value is lost each day as expiration approaches (accelerates near expiration).

• Vega: sensitivity to implied volatility (IV). High IV makes options expensive; IV can collapse after big events (“IV crush”).

Why we use spreads (and not just buying options)

• Buying options fights theta (time decay). You must be right on direction, speed, and timing.

• Credit spreads let you sell premium: time decay works in your favor and risk is defined (max loss known upfront).

• Example idea: a bull put spread profits if price stays above your short strike; a bear call spread profits if price stays below your short strike.