Options Basics & Strategies

Options Fundamentals

• Call: RIGHT to BUY at strike price
• Put: RIGHT to SELL at strike price
• Premium: price paid for the option contract
• Strike price: price at which underlying can be bought/sold
• Expiration: last date option can be exercised
• 1 contract = 100 shares

Intrinsic Value

• Call: Stock Price - Strike Price (if positive, otherwise 0)
• Put: Strike Price - Stock Price (if positive, otherwise 0)
• In-the-money: has intrinsic value
• Out-of-the-money: no intrinsic value
• At-the-money: stock price = strike price

Time Value = Premium - Intrinsic Value

• Decreases as expiration approaches (time decay)
• At expiration, only intrinsic value remains

Breakeven Formulas

• Call breakeven = Strike + Premium
• Put breakeven = Strike - Premium

Max Gain / Max Loss Table:

Long Call (buyer of call — BULLISH):

• Max gain: UNLIMITED (stock can rise indefinitely)
• Max loss: Premium paid
• Breakeven: Strike + Premium

Short Call (seller/writer of call — BEARISH/NEUTRAL):

• Max gain: Premium received
• Max loss: UNLIMITED
• Breakeven: Strike + Premium

Long Put (buyer of put — BEARISH):

• Max gain: Strike - Premium (stock can only go to 0)
• Max loss: Premium paid
• Breakeven: Strike - Premium

Short Put (seller/writer of put — BULLISH/NEUTRAL):

• Max gain: Premium received
• Max loss: Strike - Premium (stock goes to 0)
• Breakeven: Strike - Premium

Key Strategies

• Covered Call: Own stock + sell call — generates income, caps upside
• Protective Put: Own stock + buy put — insurance against decline (like buying a floor)
• Straddle: Buy call AND put at SAME strike — profit from big move in EITHER direction
• Bull Call Spread: Buy lower strike call + sell higher strike call — bullish, limited risk/reward
• Bear Put Spread: Buy higher strike put + sell lower strike put — bearish, limited risk/reward