What Is an Option?
An option is a contract that gives you the right — but not the obligation — to buy or sell a stock at a specific price before a set date. You pay a premium for this right. Options let you control 100 shares of stock for a fraction of the cost of buying those shares outright.
- Call option — the right to BUY 100 shares at the strike price. Calls gain value when the underlying stock rises.
- Put option — the right to SELL 100 shares at the strike price. Puts gain value when the underlying stock falls.
Key Terms
Strike Price
The price at which you have the right to buy (call) or sell (put) the stock. If AAPL is trading at $200 and you buy a $210 call, you have the right to buy AAPL at $210. For that to be profitable, AAPL needs to rise above $210 plus the premium you paid.
Expiration Date
Options expire on a specific date. After expiration they are either exercised or worthless. Weekly options expire every Friday; monthly options expire on the third Friday of each month. Shorter expiration = cheaper premium but faster time decay.
Premium
The price you pay for the option contract. Premium has two components: intrinsic value (how far in-the-money the option is) and extrinsic value (time value + implied volatility). An out-of-the-money option is 100% extrinsic value — it is a bet on future movement.
The Greeks
Delta (Δ)
How much the option price moves for every $1 move in the underlying stock. A delta of 0.5 means the option gains $0.50 per $1 move in the stock. At-the-money options have a delta near 0.50. Deep in-the-money options approach delta of 1.0. Delta also approximates the probability that the option expires in-the-money.
Theta (Θ)
Time decay. Theta is the amount an option loses in value each day, all else being equal. Theta accelerates as expiration approaches. This is why buying cheap weekly options is difficult — you are fighting rapid decay. Theta works in your favor when you sell options.
Gamma (Γ)
The rate of change of delta. High gamma means delta changes rapidly as price moves. Near-expiration at-the-money options have the highest gamma — they can flip from worthless to highly valuable very quickly, making them both exciting and dangerous.
Vega
Sensitivity to changes in implied volatility (IV). When IV rises (before earnings, during market stress), option premiums inflate. When IV collapses after earnings — the “IV crush” — premiums deflate even if the stock moved in your direction. Buying options into high IV is expensive; selling options into high IV is lucrative.
Practical Starting Point
If you are new to options, start with buying calls and puts on liquid, large-cap stocks (AAPL, SPY, QQQ). Use the 30–45 days-to-expiration range where theta decay is more manageable. Target a delta between 0.40–0.60. Never risk more than 1–2% of your account on a single options position.
The most common mistake beginners make: buying cheap, far out-of-the-money weekly options. They look affordable but are lottery tickets. Focus on risk-adjusted quality, not the lowest premium.