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Category: Options

  • How to read an option chain

    An option chain is the table your broker shows with every available option for a stock. It looks overwhelming at first, but it follows a simple layout. Once you can read it, you can quickly see what an option costs and whether it is easy to trade.

    The layout

    You first pick an expiration date. The chain then lists strike prices down the middle, with calls on one side and puts on the other. Strikes near the current stock price are usually highlighted, because those options are the most actively traded.

    The main columns

    Column Meaning
    Bid The highest price buyers are offering right now
    Ask The lowest price sellers will accept right now
    Last The price of the most recent trade, which may be old
    Volume Contracts traded today
    Open interest Contracts currently open, from previous days
    IV The implied volatility of that option
    Delta How much the option moves per $1 in the stock. See the Greeks

    In, at and out of the money

    • In the money (ITM): a call with a strike below the stock price, or a put with a strike above it.
    • At the money (ATM): strike close to the stock price.
    • Out of the money (OTM): a call with a strike above the stock price, or a put with a strike below it. Cheaper, but more likely to expire worthless.

    Spotting costly options

    Check liquidity first Important

    If the bid is $1.00 and the ask is $1.40, you lose about 40 cents per share ($40 per contract) just by buying and selling straight away. Prefer options with a narrow bid-ask spread, daily volume and healthy open interest. Avoid strikes where the “last” price is from days ago.

    Placing the order

    Use a limit order and start around the middle of the bid and ask (the “mid”). If it does not fill, move your price a few cents at a time rather than jumping straight to the ask.

    Remember the multiplier. A quoted price of $1.20 usually means $120 per contract, because one contract covers 100 shares.

    Conclusion

    Read the chain in this order: expiration, strike, bid and ask, then volume and open interest. That habit alone will save you from many poor fills. New to options? Read options basics.

  • Vertical spreads: limiting risk with bull and bear spreads

    A vertical spread means buying one option and selling another of the same type and expiry, at a different strike. It caps both your potential profit and your potential loss. For many traders it is a more controlled way to trade options than buying or selling a single contract.

    Debit spreads: a bull call spread

    A stock trades at $100. You buy the $100 call for $4 and sell the $110 call for $1.50. Your net cost (debit) is $2.50, or $250 per spread.

    Item Formula Example
    Maximum loss Net debit $250
    Maximum profit Strike width − debit ($10 − $2.50) × 100 = $750
    Break-even Lower strike + debit $102.50

    Compared with buying the $100 call alone for $400, you pay less and need a smaller move to break even, but you give up gains above $110.

    Credit spreads: a bull put spread

    You sell the $95 put for $2 and buy the $90 put for $0.80. You receive a credit of $1.20 ($120). If the stock stays above $95 at expiry, both puts expire worthless and you keep $120. Your maximum loss is the width minus the credit: ($5 − $1.20) × 100 = $380.

    The four basic verticals

    Spread View Pay or receive
    Bull call spread Up Pay (debit)
    Bear put spread Down Pay (debit)
    Bull put spread Up or sideways Receive (credit)
    Bear call spread Down or sideways Receive (credit)

    Why traders use spreads Defined risk

    Pros

    • Maximum loss is known up front
    • Lower cost, less hurt by IV crush

    Cons

    • Profit is capped
    • Two bid-ask spreads to pay
    Watch expiration day. If the stock finishes between your strikes, one leg may be assigned and the other not. Close spreads before expiry unless you understand exactly what will happen.

    Conclusion

    Vertical spreads let you choose your risk before you enter. Always enter them as a single order with a limit price, and size them using our risk management rules.

  • Implied volatility and IV crush: why options get cheap after earnings

    Implied volatility (IV) is the market’s estimate of how much a stock is likely to move. When traders expect a big move, options get more expensive. When the event passes, that extra value can disappear overnight. Understanding IV is the difference between buying options at a fair price and overpaying.

    What implied volatility means

    IV is shown as a yearly percentage. An IV of 30% means the market is pricing in roughly a 30% move up or down over a year, for about one standard deviation. You do not need to calculate it. What matters is whether it is high or low compared with that stock’s own history.

    IV crush around earnings

    Before an earnings report, uncertainty is high, so IV rises and options get expensive. Right after the report, the uncertainty is gone and IV falls sharply. This drop is called IV crush.

    Right direction, still a loss Common trap

    A stock trades at $100 before earnings, and the market expects about an $8 move. You buy a call. The stock rises $4 after the report. That is the right direction, but smaller than the market expected, so the drop in IV can wipe out the gain from the price move and your call may be worth less than you paid.

    Useful IV tools

    Tool What it tells you
    IV rank Where today’s IV sits between its lowest and highest level over the past year (0–100)
    IV percentile The share of days in the past year when IV was lower than today
    Expected move The move the options market is pricing in, often shown by brokers before earnings

    How to use it

    • High IV: options are expensive. Buying them needs a bigger move. Selling strategies, or spreads that offset the cost, are often considered instead.
    • Low IV: options are cheaper, so buying them is less of a handicap, though low IV can stay low for a long time.
    • Before events: check the expected move. If you do not expect a bigger move than that, buying options is a poor bet.
    Volatility is not direction. High IV says a big move is expected, not which way. Stocks can fall sharply on good news and rise on bad.

    Conclusion

    Every option price includes a bet on volatility. Check IV before you trade, especially near earnings, and read our guide to the Greeks to see how vega measures this risk.

  • Options basics: calls, puts and premiums explained

    An option is a contract that gives you the right, but not the obligation, to buy or sell a stock at a set price before a set date. Options are flexible, but they also lose value over time, which is why many beginners lose money even when they guess the direction correctly.

    The key terms

    Term Meaning
    Call option The right to buy the stock at the strike price
    Put option The right to sell the stock at the strike price
    Strike price The price at which you can buy or sell
    Expiration The last date the option is valid
    Premium The price you pay for the option
    Contract size A standard US stock option covers 100 shares

    A simple call example

    Say a stock trades at $50. You buy one call with a $55 strike that expires in two months, for a premium of $2 per share. Because one contract covers 100 shares, you pay $200.

    • If the stock rises to $60 at expiration, the option is worth $5 per share ($500). Your profit is $500 − $200 = $300.
    • If the stock stays at or below $55, the option expires worthless and you lose the full $200.

    Your break-even at expiration is the strike plus the premium: $55 + $2 = $57.

    What moves an option’s price?

    • The stock price. Calls gain when the stock rises; puts gain when it falls.
    • Time. Options lose value as expiration gets closer. This is called time decay.
    • Volatility. When the market expects bigger moves, options get more expensive. After big events like earnings, that extra value often drops quickly.

    Buying vs selling options

    Buying options Risk is limited

    The most you can lose is the premium you paid. The trade-off is that you need the stock to move enough, and soon enough, to beat time decay.

    Selling options Higher risk

    You collect the premium up front, and time decay works in your favour. But the risk can be much larger than the premium. Selling a call without owning the shares (a “naked” call) has theoretically unlimited risk. Covered calls and cash-secured puts are more conservative ways to sell options.

    Before you trade options: brokers require options approval, and many offer paper trading. Practice there first, and never buy options with money you need in the next few months.

    Conclusion

    Options are a tool, not a shortcut to quick money. Learn the terms above, start with small defined-risk trades, and pair every trade with a clear risk plan.

  • The options Greeks: delta, gamma, theta and vega

    The Greeks are numbers that show how an option’s price is likely to change when something else changes: the stock price, time, or volatility. Your broker calculates them for you. You do not need the math, but you do need to know what each one is telling you.

    The four Greeks at a glance

    Greek Measures change from Simple meaning
    Delta Stock price How much the option moves for a $1 move in the stock
    Gamma Stock price (on delta) How fast delta itself changes
    Theta Time How much value the option loses per day
    Vega Volatility How much the option moves for a 1-point change in implied volatility

    Delta

    Calls have a delta between 0 and 1; puts between 0 and −1. A call with a delta of 0.40 should gain about $0.40 per share (about $40 per contract) if the stock rises $1. Many traders also read delta as a rough guide to the chance the option ends in the money, though it is only an approximation.

    Gamma

    Gamma tells you how much delta will change after a $1 move. It is highest for at-the-money options close to expiry. High gamma means the option’s behaviour can change very quickly, which is exciting for buyers and dangerous for sellers.

    Theta

    Theta is time decay. An option with a theta of −0.05 loses about $5 per contract per day if nothing else changes. Decay speeds up as expiration gets closer, which is why option buyers fight the clock and sellers benefit from it.

    Vega

    Vega shows sensitivity to implied volatility. If vega is 0.10 and implied volatility drops 5 points, the option loses about $0.50 per share. This is how traders can be right on direction and still lose money after earnings.

    Putting it together Example

    You buy a call with delta 0.50, theta −0.04 and vega 0.12. Tomorrow the stock rises $1 (+$0.50), a day passes (−$0.04) and volatility falls 3 points (−$0.36). The option rises only about $0.10, not the $0.50 you might expect.

    The Greeks change constantly. They are estimates for small moves, and they shift as price, time and volatility change. Check them before every trade, not just once.

    Conclusion

    Delta tells you about direction, theta about time, vega about volatility, and gamma about how quickly things can change. Learn these four and option prices will start to make sense. Start with options basics if the terms are new.

  • Cash-secured puts: getting paid to wait for a lower price

    A cash-secured put means you sell a put option and keep enough cash in your account to buy 100 shares at the strike price. You get paid a premium now. If the stock falls below the strike, you may have to buy the shares. Many people use it as a way to buy stocks they already want, at a lower price.

    A simple example

    A stock trades at $50 and you would be happy to own it at $45. You sell one put with a $45 strike, 30 days out, for $1.20 per share. You receive $120 and must keep $4,500 in cash set aside.

    • The stock stays above $45: the put expires worthless and you keep the $120.
    • The stock falls below $45: you are likely assigned and buy 100 shares at $45. Your real cost is $45 − $1.20 = $43.80 per share.

    Break-even and maximum loss

    Item Formula In this example
    Maximum profit Premium received $120
    Break-even Strike − premium $43.80
    Maximum loss (Strike − premium) × 100, if the stock goes to zero $4,380

    The real risk

    Falling knives Watch out

    Puts pay the most premium on stocks that the market thinks may fall hard. A high premium is often a warning, not a gift. If the stock drops from $50 to $30, you still buy at $45. Only sell puts on companies you would genuinely want to own at the strike price, through a bad stretch.

    Why “cash-secured” matters

    Some brokers let you sell puts on margin without holding the full cash. That increases your return on paper, but it also means a sharp drop can trigger margin calls. Keeping the full amount in cash keeps the strategy as conservative as it is meant to be.

    The “wheel”

    Some traders combine this with covered calls: sell puts until assigned, then sell calls on the shares until they are called away, and repeat. It can produce steady income in calm markets, but it still carries the full downside of owning the stock.

    Size it carefully. Each put can turn into a full 100-share position. Use the same position sizing you would use if you bought the shares outright.

    Conclusion

    A cash-secured put is a limit order that pays you to wait. It is a reasonable tool when you want the stock anyway, and a risky one when you only want the premium.

  • Covered calls explained: earning premium on shares you own

    A covered call means you own at least 100 shares of a stock and sell one call option against them. You get paid a premium today, and in return you agree to sell your shares at the strike price if the buyer exercises. It is one of the most common ways to sell options, and one of the easiest to misunderstand.

    How a covered call works

    Say you own 100 shares of a stock trading at $40. You sell one call with a $45 strike that expires in 30 days and collect a premium of $1 per share, which is $100. Three things can happen by expiration:

    • The stock stays below $45. The call expires worthless. You keep the $100 and your shares, and you can sell another call.
    • The stock rises above $45. Your shares are likely called away at $45. You keep the $100 premium plus the gain from $40 to $45, but you miss anything above $45.
    • The stock falls. You keep the $100, which softens the loss a little, but you still own shares that are worth less.

    The numbers in one table

    Stock price at expiry Result on 100 shares (bought at $40)
    $35 −$500 on shares + $100 premium = −$400
    $40 $0 on shares + $100 premium = +$100
    $45 +$500 on shares + $100 premium = +$600 (maximum)
    $55 Shares sold at $45, so still +$600

    Notice the shape: your upside is capped, but your downside is almost the same as just holding the stock.

    What you give up

    The trade-off Capped upside

    A covered call does not protect you from a crash. The premium is small compared with what the stock can lose. What you sell is the chance of a big move up. If you would be upset to sell the stock at the strike price, do not sell the call.

    Pros

    • Regular premium income
    • Lower risk than holding shares alone

    Cons

    • Gains above the strike are lost
    • Losses on the shares are still yours

    Early assignment

    US stock options can be exercised any time before expiry. Early assignment is uncommon, but it happens more often when the call is deep in the money or just before the stock pays a dividend. Plan as if your shares could be sold at the strike on any day.

    Choosing a strike and expiry

    • Strike further above the price: less premium, but more room for the stock to grow.
    • Strike close to the price: more premium, but a higher chance your shares are called away.
    • Expiry 30–45 days out is popular because time decay speeds up in the last month, but there is no single right answer.
    Taxes matter. Having shares called away is a sale, which can create a taxable gain. Check the rules in your country before you start.

    Conclusion

    Covered calls turn some of a stock’s future upside into cash today. They work best on shares you are happy to hold and happy to sell at the strike. If you are new to options, read options basics first. You can also pair them with cash-secured puts.