Options

1️⃣ Basics of Options

Term	Meaning
Call Option	Right to buy the underlying asset at strike price before/at expiry
Put Option	Right to sell the underlying asset at strike price before/at expiry
Premium	Price paid to buy the option
Strike Price (K)	Price at which the option can be exercised
Expiry	Last day option is valid
In-the-Money (ITM)	Call: Stock > Strike; Put: Stock < Strike
Out-of-the-Money (OTM)	Call: Stock < Strike; Put: Stock > Strike
At-the-Money (ATM)	Stock ≈ Strike

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2️⃣ Option Value Components

Component	Definition
Intrinsic Value	Amount by which option is ITM: Call: Max(0, S-K) Put: Max(0, K-S)
Time Value	Premium – Intrinsic Value; decreases as expiry approaches
Theta	Time decay rate: value lost per day
Vega	Sensitivity to implied volatility
Delta	Sensitivity to underlying price changes
Gamma	Rate of change of delta

Tip:

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3️⃣ Profit / Loss for Simple Positions

Call Option (Buy)

• Profit = Max(0, S-K) – Premium
• Loss = Premium (if expires OTM)

Put Option (Buy)

• Profit = Max(0, K-S) – Premium
• Loss = Premium

Short Calls / Puts

• Short calls → unlimited loss if stock rises above strike
• Short puts → large loss if stock falls below strike

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4️⃣ Settlement

Type	Description
Exchange-Traded	Cleared by central clearinghouse (e.g., OCC, SGX Clearing). Guarantees settlement. Can be physical or cash-settled.
OTC	Bilateral between parties. Counterparty risk exists. Usually cash-settled.

Most retail traders use

exchange-traded options

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5️⃣ Basic Strategies

A. Directional / Simple

Strategy	Position	Risk	Reward	When to Use
Long Call	Buy call	Premium paid	Unlimited	Expect stock to rise
Long Put	Buy put	Premium paid	Limited to K	Expect stock to fall
Covered Call	Own stock + sell call	Limited by stock price	Premium + stock gains	Earn income, limit upside
Cash-Secured Put	Hold cash + sell put	Buy stock at strike if exercised	Premium	Acquire stock at discount

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B. Spreads

Strategy	Structure	Goal
Bull Call Spread	Buy call low strike + sell call high strike	Profit from moderate rise; reduces cost
Bear Put Spread	Buy put high strike + sell put low strike	Profit from moderate drop; reduces cost
Credit Spread	Sell option closer to ATM, buy further OTM	Collect premium, limited risk

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C. Volatility Plays

Strategy	Structure	Goal
Straddle	Buy call + put same strike	Profit if stock moves a lot in either direction
Strangle	Buy call + put at different strikes	Cheaper than straddle; needs larger move

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D. Risk / Reward Overview

Position	Max Loss	Max Gain	Breakeven
Long Call	Premium	Unlimited	Strike + Premium
Long Put	Premium	Strike – Premium	Strike – Premium
Short Call	Unlimited	Premium	Strike + Premium
Short Put	Strike – Premium	Premium	Strike – Premium

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6️⃣ Key Concepts to Remember

1. Time Decay (Theta): Options lose value as expiry approaches. Faster for OTM options.
2. Intrinsic vs Time Value: Intrinsic is “real money,” time value is “hope money.”
3. Leverage: Small stock moves → large P/L swings.
4. Liquidity: Trade only options with enough volume to enter/exit efficiently.
5. Greeks: Delta (price sensitivity), Theta (time decay), Vega (volatility).

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7️⃣ Practical Tips for Beginners

1. Start with long calls or puts. Avoid spreads initially.
2. Risk only what you can afford to lose (premium).
3. Paper trade first to understand payoff diagrams.
4. Track Greeks, especially Theta and Delta.
5. Sell before expiry if OTM to minimize loss.

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8️⃣ Quick Payoff Visuals

Long Call

Profit
  |
  |       /
  |      /
  |     /
  |    /
  |___/________ Stock Price
      K
Loss = Premium

Long Put

Profit
  |
  |\\
  | \\
  |  \\
  |   \\
  |____\\_____ Stock Price
       K
Loss = Premium

Covered Call

Profit
  |\\
  | \\
  |  \\____ max = strike + premium
Loss = Stock decline – premium

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9️⃣ Suggested Learning Path

1. Learn calls and puts basics.
2. Paper trade long options on stocks you know.
3. Experiment with bull/bear spreads.
4. Add volatility strategies (straddles/strangles).
5. Track Greeks and Theta decay to understand time effect.
6. Gradually explore income strategies like covered calls or cash-secured puts.