Derivatives & Options
Hedging, leverage, and optionality.
A derivative takes its value from something else, and that idea powers the hedging and leverage tools at the center of this topic.
It works through options first: what a call and a put are, how delta and implied volatility shape a price, and how a covered call turns stock into income.
Futures and swaps round it out, including the interest-rate swap that underpins much of institutional risk management.
The treatment is deliberately practical, focused on payoff, cost, and the risk you actually take on.
Investing With Purpose builds these from first principles, so optionality becomes a tool you control rather than a black box you avoid.
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An option is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset at a…
A futures contract is a standardized, exchange-traded agreement to buy or sell a specific asset at a fixed price on a…
**Delta** measures how much an option's price is expected to change for a one-dollar change in the underlying. It is…
Implied volatility is the volatility number you have to plug into an option pricing model to make the model output…
A covered call is long stock paired with a short call on the same stock. You collect premium for selling the call and…
An interest rate swap is a contract between two parties to exchange streams of interest payments on a fixed notional…
More in Derivatives & Options
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.…
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…
**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 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…
Every futures contract has a printed specification sheet that defines exactly what is being traded. These specs…
Tick value is the dollar amount you win or lose when a futures contract moves by one minimum price increment. It is the…
Futures margin is the performance bond a trader posts to guarantee future contract obligations, not a down payment on a…
When a futures contract expires, it settles in one of two ways: cash or physical delivery. The choice is baked into the…