Options
Few instruments give you the precision of options, and this category teaches them from the ground up.
The explainers start with calls and puts and the Greeks that govern how an option behaves, then build through the strategy set: covered and protective positions, collars, spreads, straddles, and strangles.
The focus stays on payoff, breakeven, and how implied volatility and time decay quietly reshape every position.
Investing With Purpose pushes defined-risk thinking, so you always know exactly what you hold and what the worst case looks like.
Whether you want income, a hedge, or a leveraged view, this is where options pricing, the Greeks, and the strategies that express any market opinion become usable.
An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a…
Moneyness describes where the current price of the underlying sits relative to the strike price of an option. It is the…
The put/call ratio (P/C) divides the number of puts traded by the number of calls traded over a period. Cboe publishes…
**Rho** measures how much an option's price changes when the risk-free interest rate moves by one percentage point. It…
Strike price and expiration are the two fixed terms written into every option contract. They define the price at which…
The premium is the market price of an option. A buyer pays it to acquire the right the contract confers, and a seller…
Every option premium is the sum of two parts. Intrinsic value is what the contract is worth if exercised right now.…
Implied volatility is the volatility number you have to plug into an option pricing model to make the model output…
IV rank and IV percentile are two ways to ask the same question: is the current implied volatility of a name high or…
Historical volatility measures what has already happened. Implied volatility measures what the options market thinks…
The **Greeks** are the partial derivatives of an option's theoretical price with respect to each of the inputs that…
**Delta** measures how much an option's price is expected to change for a one-dollar change in the underlying. It is…
**Gamma** measures how fast delta itself is changing. It is the rate of change of an option's delta with respect to a…
**Theta** measures how much an option's price erodes as one day of calendar time passes, with all other inputs held…
**Vega** measures how much an option's price changes when implied volatility moves by one percentage point. It is the…
**Put-call parity** is the no-arbitrage relationship that ties together the prices of a European call, a European put,…
A covered call is long stock paired with a short call on the same stock. You collect premium for selling the call and…
A protective put pairs a long stock position with a long put on the same stock. The put acts as insurance, capping the…
A collar combines a protective put and a covered call on the same long stock position. You buy a downside put and…
A vertical spread is a two-leg option position where you buy one option and sell another of the same type, on the same…
An iron condor is a four-leg option position that profits when the underlying stays inside a defined range. It combines…
A butterfly spread is a three-strike option structure that pays off when the underlying lands near the middle strike at…
A straddle and a strangle are two-leg volatility trades that combine a call and a put on the same underlying and…
A calendar spread is a two-leg option position with different expirations but the same strike. You sell a near-term…
Pin risk is the uncertainty that arises when a stock closes exactly at, or extremely close to, an option's strike price…
Exercise style determines when an option can be converted into its underlying payoff. American-style options can be…
In general, exercising an American call option before expiration throws away time value and is not rational. The one…
LEAPS are long-term options with expirations up to approximately three years from the date they are listed. They give…
The covered put strategy pairs a short stock position with a short put option, collecting premium while you wait for a…
The married put strategy means buying a stock and a put option on it at the same time, locking in a price floor from…
A protective put is a long put bought against stock you already own, setting a price floor under the position. This…
The protective call strategy is a long call bought against a short stock position, capping the loss if the stock…
A collar option strategy holds a stock between a protective put floor and a short call ceiling, defining both the most…
A costless collar is a collar where the premium from the short call fully pays for the protective put, so the hedge…
A fenced collar, often called a fence, is a collar with an extra short put added below the protective put to cut the…
The Black-Scholes model is the foundation of modern option pricing, but it is built on a set of idealized assumptions…
The binomial option pricing model values an option by building a tree of possible future prices over many small time…
The Heston model prices options when volatility itself is a random process that mean-reverts over time and can be…
The Merton jump-diffusion model extends Black-Scholes by adding sudden, discrete jumps on top of the usual smooth…
The local volatility model treats volatility as a deterministic function of the current spot price and time, calibrated…
Volatility skew is the asymmetric pattern in implied volatility across option strikes, where out-of-the-money puts and…
The term structure of volatility is the pattern of implied volatility across expiration dates for the same underlying.…
0DTE options are contracts that expire on the same trading day they are held. They have become one of the most actively…
A barrier option is an option whose payoff depends not just on where the underlying settles at expiration, but on…
An Asian option is an exotic contract whose payoff is determined by the average price of the underlying over a period…
Binary options pay a fixed amount if the underlying meets a condition at expiration and nothing otherwise. Lookback…
Volatility arbitrage is the practice of trading the spread between the volatility priced into options and the…
A one-touch option pays a fixed amount if the underlying trades at or through a barrier before expiry. A no-touch…
A dispersion trade sells index volatility and buys single-stock volatility on the index components. The position…
A risk reversal is a two-legged option position: long an out-of-the-money call and short an out-of-the-money put with…
A variance dispersion trade uses variance swaps to express the same index-versus-components view as a classical…
A volatility term-structure trade takes a position on the shape of implied volatility across expirations rather than on…
The risk-neutral density is the market-implied probability distribution of an underlying's price at a future date, read…
Gamma scalping is an options strategy that monetizes the curvature of an option position by repeatedly rehedging delta…
VIX futures price the market's forward expectation of 30-day SPX implied volatility at each listed expiration. The…
A cliquet option is a series of forward-starting options, each one struck at-the-money on a reset date and paying off…
Dividend-protected options adjust the strike price, the deliverable, or both, when the underlying pays a special or…
Fixed-strike volatility is the implied volatility of an option at a specific absolute strike price, tracked as the…
The skew term structure is how implied volatility skew evolves across expirations. Short-dated options typically show…
A call ratio spread is a multi-leg position that buys one call at a lower strike and sells more calls at a higher…
A put ratio backspread is an options position that sells one higher-strike put and buys two or more lower-strike puts…
A Christmas tree spread is a six-contract option position that uses three strikes to create a profit zone shaped like a…
A double calendar spread is two calendar spreads opened together at different strikes, one with calls and one with…
A double diagonal spread is a four-leg option position that combines a diagonal call spread and a diagonal put spread…
An unbalanced butterfly is a butterfly spread with unequal contract counts on the two wings, or with strikes that are…
A broken wing butterfly is a butterfly spread where one wing is wider than the other because the trader skipped a…
An iron albatross spread is a wide-bodied iron condor where the short strikes sit further from the underlying than a…
A box spread is a four-leg option position that locks in a fixed payoff at expiration regardless of where the…
A jade lizard is a three-leg option position that combines a short out-of-the-money put with a short out-of-the-money…
A strap option strategy buys more calls than puts at the same strike and expiration, betting on a large move with an…
A strip option strategy buys more puts than calls at the same strike and expiration, betting on a large move with a…
A short strangle sells an out-of-the-money call and an out-of-the-money put with the same expiration, collecting two…
A short straddle sells one call and one put at the same strike price and expiration to collect two premiums at once.…
The long guts strategy buys an in-the-money call and an in-the-money put at the same time, betting on a large move in…
The short guts strategy sells an in-the-money call and an in-the-money put at the same time, collecting premium on the…
A call calendar spread sells a near-term call and buys a longer-term call at the same strike, profiting as the near…
A put calendar spread sells a near-term put and buys a longer-term put at the same strike, profiting as the near put…
A reverse calendar spread buys a near-term option and sells a longer-term option at the same strike, taking in a net…
A ratio call spread buys one call at a lower strike and sells two calls at a higher strike, usually in the same…
A ratio put spread buys one put at a higher strike and sells two puts at a lower strike, usually in the same…
A ratio call backspread sells one call at a lower strike and buys two calls at a higher strike, usually in the same…
A diagonal call spread buys a longer-term call at a lower strike and sells a shorter-term call at a higher strike. It…
A diagonal put spread is a two-leg put position where the two options differ in both strike price and expiration date.…
A bear call spread is a defined-risk options strategy that collects a net credit and profits when a stock stays flat or…
A bull put spread is a defined-risk options strategy that collects a net credit and profits when a stock stays flat or…
A long iron condor is a four-leg options strategy that pays a net debit and profits when the underlying makes a large…
A long iron butterfly is a four-leg options strategy that pays a net debit and profits when the underlying moves…
A reverse iron condor is a four-leg, defined-risk options strategy that pays a net debit and profits from a large move…
A reverse iron butterfly is a four-leg, defined-risk options strategy that pays a net debit and profits from a sharp…
A short condor is a four-leg options strategy built from a single option type, either all calls or all puts, that takes…
A short butterfly is a three-strike options strategy built from a single option type, either all calls or all puts,…
A calendar straddle sells a near-term at-the-money straddle and buys a longer-dated at-the-money straddle at the same…
A calendar strangle is a four-leg options position that combines two calendar spreads, one set at a put strike below…
A ratio vertical spread buys and sells calls (or puts) at two strikes in an uneven count, usually one long and two…
A rolled backspread is a ratio backspread whose strikes or expiration you adjust after the trade is open, usually to…
A stock replacement strategy buys a deep in-the-money call option in place of buying the shares outright. The call…
A LEAPS options strategy uses long-dated options, those expiring more than a year out, to take a position with months…
A poor man's covered call replaces the 100 shares of a normal covered call with a long, deep in-the-money call, then…
The options wheel strategy is a repeating income cycle: sell cash-secured puts on a stock you would happily own, take…
Rolling options up and out means closing a short option and reopening it at a higher strike and a later expiration in a…
Rolling options down and out means closing an option and reopening it at a lower strike and a later expiration in one…
A gamma scalping setup holds a long-gamma options position, usually a straddle, and repeatedly trades the stock to stay…
Vega hedging is the practice of offsetting an options portfolio's exposure to changes in implied volatility, so the…
Delta neutral rebalancing is the repeated adjustment of an options hedge so the position's net delta stays at or near…
A dispersion trade is an options position that sells volatility on a stock index while buying volatility on its…
A volatility arbitrage options trade buys or sells options and then hedges away the price direction, so the profit…
Options skew trading is a strategy that bets on the shape of implied volatility across strike prices rather than on the…
In currency markets, a risk reversal FX options quote is the difference in implied volatility between an…
Butterfly condor conversions are adjustments that reshape one four-leg neutral options spread into the other as the…
A collar rollover is the process of closing the expiring options in a collar and opening new ones at later dates or…
Stock replacement with LEAPS is a strategy that buys a deep in-the-money, long-dated call option instead of the…
A protective put rollover is the act of closing an expiring long put and opening a new one at a later date, so a stock…
Condor adjustment rolling is the practice of repairing an iron condor that the market has moved against by shifting one…
A broken wing condor is a four-leg options spread, similar to a condor, but with one wing set farther from the body…
An unbalanced iron condor is an iron condor whose two sides are not symmetric, either because one side has more…
A box spread is a four-leg options position that combines a bull call spread with a bear put spread at the same two…
A jelly roll combines a call calendar spread and a put calendar spread at the same strike to isolate the cost of carry…
Conversion arbitrage is a three-leg trade that holds long stock, a long put, and a short call at the same strike and…
Reversal arbitrage options trades, also called reverse conversions, short the stock, buy a call, and sell a put at the…
A zero cost collar protects a stock position by buying a put for downside protection and selling a call to pay for it,…
A fence spread options strategy, sometimes called a three-way collar, hedges a long stock position with a long put, a…
Dynamic delta hedging keeps an option position roughly neutral to small moves in the underlying by repeatedly adjusting…