Options Trading Lecture Notes

Overview of Options Trading

• Trillions of dollars traded daily on the stock market.
• Options trading allows investors to bet on stock prices without owning shares directly.
• A free options trading guide is available (details later).

What is Options Trading?

• Involves buying and selling options contracts.
• Options give the holder the right, but not the obligation, to buy or sell an underlying asset at a specific price before a specific time.
• Similar to a voucher allowing a future purchase at today’s price.

Key Terms and Concepts

Call Option

• Definition: Gives the holder the right to buy an asset at the strike price.
• Example: Buying a call option for a smartphone to lock in today’s price for future purchase.
• Scenario: Stock at $100, buy call option at $105 for a $3 premium. If stock rises to $120, exercise option for profit; if it drops, lose premium.

Put Option

• Definition: Gives the holder the right to sell an asset at the strike price.
• Scenario: Stock at $100, buy put option at $95 for a $3 premium. If stock drops to $80, exercise option for profit; if it rises, lose premium.

Expiration Date

• Options become worthless if not exercised by expiration.
• More time before expiration increases value; value decreases as expiration date approaches (time decay).

Strike Price

• The agreed-upon price for buying/selling the asset if the option is exercised.
• In the Money: Call option strike price below market price; put option strike price above market price.
• Out of the Money: Call option strike price above market price; put option strike price below market price.
• At the Money: Strike price equals market price.

Premium

• The fee paid by the option buyer to the seller for the option contract.

The Greeks

• Used to gauge options premiums and measure risks:
  • Delta: Sensitivity to price changes.
  • Gamma: Delta’s sensitivity to price changes.
  • Theta (Time Decay): Sensitivity to the passage of time.
  • Vega: Sensitivity to changes in volatility.
  • Rho: Sensitivity to interest rate changes.

Reasons for Trading Options

1. Limiting Downside Risk: Maximum loss is the premium paid, unlike stock ownership.
2. Leverage: Smaller investment can control larger stock positions, leading to potentially higher returns with capped losses.

Options Trading Strategies

Buying Calls (Long Calls)

• Scenario: Bullish on stock expecting price increase.
• Example: Buy a call for Rocket Corp at $55 for a $2 premium; if stock rises to $70, profit calculation: (70 - 55 - 2) = $13.

Buying Puts (Long Puts)

• Scenario: Bearish on stock expecting price drop.
• Example: Buy a put for Rocket Corp at $45 for a $2 premium; if stock falls to $30, profit calculation: (45 - 30 - 2) = $13.

Covered Calls

• Selling a call option on an owned stock to generate income.
• Example: Own Blue Sky Technologies at $100, sell call at $110 for a $3 premium; if stock stays under $110, keep premium.

Protective Puts

• Buying a put option to protect gains on stock investments.
• Example: Own Green Earth Innovations at $150, buy put at $140 for a $5 premium; if stock drops to $120, exercise put to limit loss.

Conclusion

• Covered calls and protective puts balance risk and reward.
• Covered calls generate income but might limit upside; protective puts limit losses.
• Access the free options trading guide in the description.

Call to Action

• Like the video to support the team.
• Comment on topics for future content.
• Follow on Instagram @Wstre for updates.