Options Education
Learn how stock options work, how option contracts are priced, how expiration and volatility affect options, how calls and puts create different rights and obligations, and how options research can be combined with fundamental, valuation, and chart research.
What this course covers
Options are contracts tied to an underlying security. This course teaches options from the ground up: what a contract is, how premiums are priced, how expiration and volatility affect value, what rights a buyer holds, what obligations a seller accepts, and how options research can be studied alongside fundamental, valuation, and chart research.
Research the underlying stock before researching the option contract.
An option derives its value from an underlying security. Understanding the company, valuation, recent price behavior, and risks of the underlying stock provides important context before evaluating an option contract.
How the Course Progresses
The course moves from option basics through pricing, expiration, and risk, then through buying and selling positions, and finally into a complete options research process.
- 1Option Basics
- 2Option Pricing
- 3Expiration and Time Decay
- 4Risk and the Greeks
- 5Buying Options
- 6Selling Calls
- 7Selling Puts
- 8Combining Options With Stock Research
- 9Complete Options Research
Options Education Lessons
Understanding Stock Options
Learn the basic structure of stock options, including calls, puts, strike prices, expiration dates, premiums, option buyers and sellers, and the relationship between an option contract and its underlying stock.
Read LessonUnderstanding Option Prices and Premiums
Learn how option premiums work, including intrinsic value, extrinsic value, moneyness, bid and ask prices, contract cost, and the major factors that can influence option prices.
Read LessonUnderstanding Expiration and Time Decay
Learn how expiration dates and remaining time affect option contracts, why options lose time value as expiration approaches, and why owning an option differs from owning the underlying stock.
Read LessonUnderstanding Option Risk and the Greeks
Learn how delta, gamma, theta, vega, implied volatility, and other risk measurements can help describe how an option may respond to changing market conditions.
Read LessonBuying Calls and Buying Puts
Learn the mechanics, rights, risks, maximum loss, expiration breakeven, and profit-and-loss structure of buying calls and buying puts.
Read LessonSelling Calls
Learn how selling calls works, including covered calls, premiums, assignment, expiration, opportunity cost, and the obligations created when a call option is sold.
Read LessonSelling Puts
Learn how selling puts works, including cash-secured puts, premiums, assignment, effective purchase price, expiration, and the obligation to purchase shares if assigned.
Read LessonCombining Options With Stock Research
Learn how fundamental analysis, valuation research, stock charts, volatility, expiration, liquidity, and option pricing can provide context when researching an options strategy.
Read LessonPutting Options Research Together
Bring the course together with a structured options research process covering the underlying stock, strategy mechanics, strike price, expiration, premium, liquidity, assignment, exercise, risk, and scenario analysis.
Read LessonWhat You'll Learn
- Understand the basic structure of stock option contracts.
- Distinguish calls from puts.
- Distinguish option buyers from option sellers.
- Understand strike prices, expiration dates, and premiums.
- Understand intrinsic value and extrinsic value.
- Understand in-the-money, at-the-money, and out-of-the-money options.
- Understand how time affects option value.
- Understand implied volatility conceptually.
- Understand delta, gamma, theta, and vega as risk measurements.
- Understand the mechanics and risks of buying calls.
- Understand the mechanics and risks of buying puts.
- Understand the mechanics and obligations of selling calls.
- Understand covered calls.
- Understand the mechanics and obligations of selling puts.
- Understand cash-secured puts.
- Calculate maximum gain, maximum loss, and breakeven at expiration where those quantities are defined.
- Understand assignment and exercise.
- Evaluate bid/ask spreads and option liquidity.
- Distinguish expiration payoff from an option's value before expiration.
- Connect options research with underlying-stock research.
Learning these concepts can improve understanding of how options work. It does not guarantee successful trading or a particular result.
Options Research Principles
- 1Research the underlying stock before researching the option contract.
- 2Understand the rights and obligations created by the strategy.
- 3Know the strike price and expiration date.
- 4Understand how much capital is at risk.
- 5Distinguish maximum loss from probable loss.
- 6Distinguish maximum gain from expected gain.
- 7Understand breakeven at expiration before interpreting it.
- 8Remember that an option can change value before expiration.
- 9Consider liquidity and the bid/ask spread.
- 10Understand assignment and exercise risk.
- 11Separate scenario analysis from prediction.
- 12Never assume that collecting a premium eliminates risk.
Option Buyer vs. Option Seller
| Position | Basic Right or Obligation | Premium | Potential Assignment/Exercise Consideration | Core Risk Question |
|---|---|---|---|---|
| Call Buyer | Holds the right, but not the obligation, to buy shares at the strike price before or at expiration. | Pays the premium. | May choose to exercise; cannot be assigned. | How much premium is at risk if the option expires worthless? |
| Put Buyer | Holds the right, but not the obligation, to sell shares at the strike price before or at expiration. | Pays the premium. | May choose to exercise; cannot be assigned. | How much premium is at risk if the option expires worthless? |
| Call Seller | Accepts the obligation to sell shares at the strike price if assigned. | Receives the premium. | Can be assigned, which would require delivering shares. | What happens if the underlying stock rises well above the strike price? |
| Put Seller | Accepts the obligation to buy shares at the strike price if assigned. | Receives the premium. | Can be assigned, which would require purchasing shares. | Is the capital available, and is the underlying stock one worth researching as a purchase? |
This comparison is introductory. Each position is taught in detail in its own lesson.
Calls and Puts at a Glance
| Position | Basic Contract Exposure | Buyer or Seller | Right or Obligation | Key Question to Research |
|---|---|---|---|---|
| Buy Call | Exposure to an increase in the underlying stock price, limited by expiration and the premium paid. | Buyer | Right to buy shares at the strike price. | Does the research support paying this premium for this amount of time? |
| Buy Put | Exposure to a decrease in the underlying stock price, limited by expiration and the premium paid. | Buyer | Right to sell shares at the strike price. | What is the maximum amount of premium at risk? |
| Sell Call | Obligation tied to an increase in the underlying stock price above the strike. | Seller | Obligation to sell shares at the strike price if assigned. | Are the shares already owned, and what is given up if assigned? |
| Sell Put | Obligation tied to a decrease in the underlying stock price below the strike. | Seller | Obligation to buy shares at the strike price if assigned. | Would purchasing the underlying stock at the strike price be acceptable? |
Any directional expectation described here is an expectation, not a guarantee. The underlying stock can move in any direction regardless of the position selected.
Start With the Underlying Stock
An option contract cannot be fully researched in isolation from the underlying stock. Before evaluating an option, researchers may consider:
- what the company does
- financial condition
- earnings history
- assets and liabilities
- recent company developments
- valuation
- 52-week price position
- chart structure
- volatility
- upcoming known events
Stock Sage applies two historical fundamental qualification rules:
- Positive EPS in at least 4 of the previous 5 years.
- Total Assets greater than Total Liabilities in each of the previous 5 years.
Stock Sage can help identify fundamentally qualified companies for further research, which can then inform research into the underlying stock behind an option contract.
Fundamental qualification does not guarantee that the stock price will rise or that an options strategy will be profitable.
How Options Education Connects With Option Sage
Option Sage is designed to help organize options research around strategy, underlying-stock information, option data, and risk considerations. This education course teaches the concepts needed to understand that research.
The strategy categories used by Option Sage are:
- Buy Calls
- Buy Puts
- Sell Calls
- Sell Puts
The application may also identify that waiting is appropriate when its criteria do not support a strategy. Waiting is a research outcome, not an instruction about any individual's account.
Within the Sage Trading Suite research approach, selling calls is primarily considered in the context of shares already owned rather than purchasing shares solely for the purpose of selling calls.
For selling puts, assignment can create an obligation to purchase shares. That makes research into the underlying stock especially important before a put is sold.
- Option Sage does not predict winning trades or know future stock prices.
- Option Sage does not guarantee profitability and does not eliminate options risk.
- Option Sage cannot guarantee whether assignment will or will not occur.
Understand Risk Before Strategy Selection
Options involve rights, obligations, expiration, and risk.
Before evaluating an option strategy, understand:
- what you have the right to do
- what you may be obligated to do
- how much capital is at risk
- what happens at expiration
- what assignment or exercise could mean
- how the option can change value before expiration
Premium received is not the same thing as guaranteed profit.
Important Terminology
- Underlying Stock
- The security an option contract is based on.
- Option Contract
- An agreement giving one party a right and the other party an obligation, tied to a strike price and expiration date.
- Call
- An option relating to buying the underlying stock at the strike price.
- Put
- An option relating to selling the underlying stock at the strike price.
- Strike Price
- The price at which the contract's right or obligation applies.
- Expiration Date
- The date the contract's rights and obligations end.
- Premium
- The price paid by the buyer and received by the seller for the contract.
- Option Buyer
- The party that pays the premium and holds the contract's right.
- Option Seller
- The party that receives the premium and accepts the contract's obligation.
- Exercise
- Using the right granted by an option contract.
- Assignment
- Being required to fulfill the obligation of an option that was sold.
- Intrinsic Value
- The portion of an option's price accounted for by the relationship between the stock price and the strike price.
- Extrinsic Value
- The portion of an option's price beyond intrinsic value, including time and volatility components.
- Implied Volatility
- A volatility measurement derived from current option prices.
- Bid
- The price a buyer is currently offering for the contract.
- Ask
- The price a seller is currently asking for the contract.
These definitions are intentionally brief. Later lessons teach each concept in detail.
What Options Research Can and Cannot Do
Options research can help a student understand:
- contract mechanics
- defined rights
- defined obligations
- expiration
- option pricing
- scenario outcomes
- risk exposure
Options research cannot guarantee:
- future stock direction
- future option prices
- profitable trades
- whether assignment will occur before expiration
- whether an option will expire in the money
- whether an investor will achieve a particular return