Lesson 12: Options Trading - Calls, Puts, and Strategies
In this lesson, we will break down options trading, how they work, and how traders use them for hedging, speculation, and income generation. Lesson Overview: 1. What Are Options? 2. Call Options vs. Put Options 3. Basic Options Trading Strategies 4. Options Greeks (Risk Metrics) 5. Advanced Options Strategies 1. What Are Options? Options are derivative contracts that give traders the right, but not the obligation, to buy or sell an asset at a predetermined price before a certain expiration date. ✔ Call Option: Right to buy at a set price (bullish). ✔ Put Option: Right to sell at a set price (bearish). ✅ Example: A trader buys a call option on Apple (AAPL) with a $150 strike price expiring in 30 days. If AAPL rises to $170, they can buy it at $150, profiting from the price difference. 2. Call Options vs. Put Options Option Type Buyer’s Rights Seller’s Obligation Best Used When Call Right to buy stock Must sell stock if exercised Expect price to go up Put Right to sell stock Must buy stock if exercised Expect price to go down ✅ Example: Bullish on Tesla? Buy a call option on TSLA. Bearish on Tesla? Buy a put option on TSLA. 3. Basic Options Trading Strategies A. Buying Calls (Bullish) ✔ Profits when stock price rises above the strike price. ✔ Limited risk (only lose the premium paid). ✅ Example: Buy AAPL $150 Call for $5 premium (costs $500, since 1 contract = 100 shares). If AAPL hits $170, profit is ($170 - $150 - $5) x 100 = $1,500. B. Buying Puts (Bearish) ✔ Profits when stock price falls below the strike price. ✔ Limited risk (only lose the premium paid). ✅ Example: Buy TSLA $200 Put for $7 premium (costs $700). If TSLA drops to $180, profit is ($200 - $180 - $7) x 100 = $1,300. C. Covered Calls (Income Strategy) ✔ Sell a call against stocks you already own to collect income. ✔ Best if the stock stays below the strike price. ✅ Example: Own 100 shares of AAPL at $150. Sell AAPL $160 Call for $4 premium (collects $400). If AAPL stays below $160, keep the $400 as profit. D. Cash-Secured Puts (Buying Stocks at a Discount) ✔ Sell a put to collect premium income and potentially buy stock at a lower price. ✅ Example: Want to buy TSLA at $180 (current price $190). Sell $180 Put for $5 premium (collects $500). If TSLA falls to $180, you buy the stock at an effective cost of $175 ($180 - $5 premium). 4. Options Greeks (Risk Metrics) A. Delta (Direction Sensitivity) Measures how much an option’s price changes per $1 move in the stock. Call Options: Delta 0 to 1 (moves up with stock). Put Options: Delta -1 to 0 (moves down with stock). B. Theta (Time Decay) Options lose value as expiration approaches. Short-term options decay faster than long-term options. C. Vega (Volatility Impact) Options become more expensive when volatility increases. High Vega = better for buyers, low Vega benefits sellers. ✅ Example: If a stock’s volatility spikes due to earnings, option prices rise even if the stock price stays the same. 5. Advanced Options Strategies A. Spreads (Low-Risk Strategies) Bull Call Spread: Buy a call & sell a higher strike call (limits risk). Bear Put Spread: Buy a put & sell a lower strike put (limits cost). B. Straddles & Strangles (Volatility Plays) Straddle: Buy a call & put at the same strike—profit if stock moves big. Strangle: Buy a call & put at different strikes—cheaper but riskier. ✅ Example: If a company has earnings soon, traders buy a straddle expecting a large price move in either direction.
- ✔ Calls = Bullish, Puts = Bearish.
- ✔ Buying options has limited risk but requires precise timing.
- ✔ Selling options generates income but has obligations.
- ✔ Understanding Delta, Theta, and Vega helps optimize trades.
Next Steps
The next lesson will cover "Risk Management & Hedging with Options"—how institutions use options to protect portfolios.