Options Basics — OptionsWizard

What an Option Contract Is

An option is a contract that gives its buyer the right — but not the obligation — to buy or sell a stock at a fixed price, before a fixed date. The buyer pays the seller a price for that right. That price is called the premium.

The buyer

Pays the premium. Gets rights: the right to buy (call) or sell (put) at the agreed price. Maximum loss is capped at the premium paid — you can never lose more than you put in as a buyer.

The seller

Collects the premium. Takes on obligations: if the buyer exercises, the seller must honor the deal. The seller's profit is capped at the premium collected — but the risk can be much larger.

Key detail: one standard option contract controls 100 shares of stock. So a $2.50 premium means $2.50 × 100 = $250 per contract. Always multiply by 100.

Calls vs Puts

There are only two kinds of options. Everything else on this site is built from these two.

Call — the right to buy

A call buyer pays for the right to buy 100 shares at the strike price before expiration. Calls go up in value when the stock rises.

Example: XYZ trades at $100. You buy a $105 call for $2.00 ($200 total). If XYZ rallies to $115, your right to buy at $105 is worth at least $10 per share — the contract is now worth $1,000+. If XYZ stays under $105, the call expires worthless and you lose the $200.

Put — the right to sell

A put buyer pays for the right to sell 100 shares at the strike price before expiration. Puts go up in value when the stock falls.

Example: XYZ trades at $100. You buy a $95 put for $2.00 ($200 total). If XYZ crashes to $85, your right to sell at $95 is worth at least $10 per share — the contract is now worth $1,000+. If XYZ stays above $95, the put expires worthless and you lose the $200.

Memory aid: "Call up" — you call the stock up to you. "Put down" — you put the stock down onto someone else. And the seller of each takes the opposite side: a call seller is paid to accept the obligation to sell shares; a put seller is paid to accept the obligation to buy shares.

The Three Moving Parts

Every option is defined by three numbers. Change any one and the price changes.

Strike price

The fixed price at which the buyer may buy (call) or sell (put) the shares. Strikes come in a ladder — for a $100 stock you might see 90, 95, 100, 105, 110. Closer to the current stock price = more expensive.

Expiration

The date the contract dies. More time until expiration = more premium, because more can happen. Options are quoted in days to expiration (DTE): 45 DTE, 21 DTE, and so on. At expiration, the contract settles and disappears.

Premium

The option's price — what the buyer pays and the seller collects, quoted per share (×100 per contract). Premium is the market's price for uncertainty: more uncertainty, higher premium.

ITM, ATM, OTM: Moneyness

"Moneyness" just describes where the strike sits relative to the stock price right now.

Term	Call example ($100 stock)	Put example ($100 stock)	What it means
In the money (ITM)	$90 strike call	$110 strike put	Exercising right now would pay off. Has intrinsic value.
At the money (ATM)	$100 strike call	$100 strike put	Strike ≈ stock price. The most "explosive" options — see Gamma.
Out of the money (OTM)	$110 strike call	$90 strike put	Exercising now would lose money. Pure time value. This is where premium sellers live.

Premium sellers mostly sell OTM options: cheaper for buyers, high probability of expiring worthless — which is exactly what the seller wants.

Buying vs Selling: The Two Sides of Every Trade

Same contract, opposite economics. This asymmetry is the entire reason the strategies on this site exist.

Buying options

Pay premium up front; rights, no obligations.
Max loss = the premium paid. Defined and capped.
Profit potential is large (unlimited on calls).
But: you are fighting time decay every single day, and most options expire worthless. You must be right about direction and timing.

Selling options

Collect premium up front; take on obligations.
Max profit = the premium collected. Capped.
Time decay works for you — every passing day erodes what you owe.
But: losses can exceed the premium (undefined on naked calls/puts). Sellers win often and lose rarely — the rare losses are what position sizing exists to survive.

The seller's bet: "I don't need to predict the future. I just need the stock to not do something extreme." That framing — probability instead of prediction — is the philosophical core of this site.

Intrinsic vs Time Value: What You're Actually Paying For

Every option's premium splits into two components:

Intrinsic value

What the option is worth right now if exercised. A $90 call on a $100 stock has $10 of intrinsic value. OTM options have zero intrinsic value — it's the part that can never decay.

Time (extrinsic) value

Everything above intrinsic value — the market's price for the chance the option becomes more valuable before expiration. This is what decays to zero as expiration approaches, faster and faster near the end.

Premium = Intrinsic value + Time value

What eats time value: (1) passing time — the biggest and most predictable force; (2) falling implied volatility — when fear drains out of the market, premiums shrink; (3) the stock drifting away from the strike. Premium sellers get paid by all three.

At expiration, time value is exactly zero — an option is worth only its intrinsic value. That's why sellers want contracts to expire OTM: worthless for the buyer means kept premium for the seller.

How an Option's Price Moves

Four forces move an option's price. Learn these and the Greeks page will feel like a recap.

📈 Stock price moves

Calls rise when the stock rises; puts rise when it falls. The rate of that move is measured by Delta — roughly, how many dollars the option gains per $1 stock move.

⏳ Time passes

Every day, time value bleeds out — faster near expiration. This daily bleed is Theta: a cost for buyers, income for sellers.

🌊 Volatility changes

When expected volatility (implied volatility) rises, all options get more expensive; when it falls, they cheapen. Sensitivity to this is Vega.

🏦 Interest rates

Higher rates nudge call prices up and put prices down slightly. The effect is small for most trades — measured by Rho.

The Greeks, explained one by one →

Exercise and Assignment

What actually happens when someone uses their rights.

Exercise (the buyer's choice)

The buyer chooses to use the contract: a call buyer buys 100 shares at the strike; a put buyer sells 100 shares at the strike. Buyers usually just sell the option itself instead — exercising early throws away remaining time value.

Assignment (the seller's surprise)

If you're short an option and the buyer exercises, you get assigned: a short call means you must sell 100 shares at the strike; a short put means you must buy 100 shares at the strike. Assignment risk is highest for ITM short options near expiration — one more reason sellers exit at 21 DTE.

American vs European style: most stock/ETF options are American-style — exercisable any day before expiration. Index options like SPX are European-style — exercisable only at expiration, which removes early-assignment risk entirely.

Why People Trade Options

Three legitimate jobs options do better than stock.

🚀 Leverage

Control 100 shares for a fraction of the cost. A $200 call can behave like owning $10,000 of stock — gains and losses are magnified. Beginners should treat leverage with extreme respect.

💰 Income

Sell options to collect premium — covered calls on stocks you own, cash-secured puts on stocks you'd buy anyway. The wheel strategy on this site is built on exactly this.

🛡️ Protection

Buy puts as insurance on a stock position: if the market falls, the puts pay off and cushion the loss. Like all insurance, it costs premium — the question is always whether the protection is worth the price.

Key Risks for Beginners

Read this twice before your first trade.

⚠️ Leverage cuts both ways

Options magnify moves. A 5% stock drop can mean a 50%+ loss on the option. Size positions so that being wrong is boring, not catastrophic.

⚠️ Time decay never sleeps

As an option buyer, you're renting time — and the rent is due daily. Most long options lose money even when the stock moves your way, just too slowly.

⚠️ Sellers can lose more than they collect

Naked short options have undefined risk. A $200 credit can turn into a $2,000+ loss on a gap move. Never sell naked without a sizing plan and an exit rule.

⚠️ Assignment and liquidity

Illiquid options have wide bid/ask spreads — a hidden tax on every trade. And ITM short options can be assigned early, especially around dividends. Trade liquid underlyings, and don't hold short premium into the danger zone.

The beginner's rule of thumb: risk only money you can afford to lose completely, keep every position small (the Rules page suggests 1–3% of account value per defined-risk trade), and paper-trade the mechanics before committing real capital.

Where to Go Next

You now speak the language. Here's the recommended learning path:

1

αβγ

The Greeks — how option prices actually move, and how sellers and buyers use each Greek

2

♟

The Playbook — nine premium-selling structures with exact setups and management

3

16

The Rules — the sixteen mechanical rules that keep sellers alive

The Trader's Toolkit

The books and desk gear behind this site. No courses for sale here — just the tools.

📘 Option Volatility & Pricing

Sheldon Natenberg

The options bible. Natenberg explains volatility, pricing models, and how market makers actually think — from basic spreads to advanced volatility trading. If you only read one book on options, this is it. Dense but readable, and every serious trader I know has a worn copy.

See it on Amazon →

📗 Options as a Strategic Investment

Lawrence G. McMillan

The encyclopedia of options strategies. McMillan documents every spread, hedge, and combination in exhaustive detail with real-world examples and risk graphs. It's the reference you reach for when building or dissecting any position. Not a cover-to-cover read — a lifetime desk companion for strategy builders.

See it on Amazon →

📙 Trading Option Greeks

Dan Passarelli

The Greeks, finally made practical. Passarelli translates delta, gamma, theta, and vega from textbook math into trading decisions — when to be long gamma, how theta really decays, what vega means for your P/L. The perfect companion to this site's Greeks page, written by a former market maker.

See it on Amazon →

🖥️ The Trading Desk

Ultrawide monitor, mechanical keyboard, a chair you can sit in for six hours — the unglamorous edge.

See desk gear on Amazon →

Affiliate disclosure: links above are Amazon affiliate links. As an Amazon Associate I earn from qualifying purchases — it costs you nothing and keeps this site free.

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