Opce

What it is

An option is a contract between a buyer and a seller that gives the buyer the right (not obligation) to buy or sell an underlying asset (stock) at the strike price up to the expiration date.

Call option: The right to buy a stock at the strike price. You buy a call when you expect the price to rise.

Put option: The right to sell a stock at the strike price. You buy a put when you expect a decline or want to hedge an existing position.

Strike price: The price at which you have the right to buy/sell the underlying asset.

Expiry (expiration date): The day the option ceases to exist. After expiration, the option is worthless if it was not exercised.

Premium: The price you pay for the option. It consists of:

• →Intrinsic value (the in-the-money portion)
• →Time value (declines as expiration approaches — the Theta effect)

Basic Greeks:

• →Delta: Sensitivity of the option price to movement in the underlying stock (0–1 for calls, 0 to -1 for puts)
• →Theta: Daily time decay of the option's value
• →Vega: Sensitivity to changes in implied volatility
• →Gamma: Change in delta when the stock moves

Why track it

Options serve two primary purposes:

1. →Speculation — exposure to a stock's movement with a predefined maximum loss (the premium paid)
2. →Hedging — protecting a portfolio against decline (buying put options)

Implied Volatility (IV): The market's estimate of future volatility embedded in the option price. High IV = expensive options (the market expects large moves). IV is typically elevated before an earnings report.

Real-world example

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