📚 Quick Learn – Your Options Trading FAQ

Options are financial contracts that give the buyer the right — but not the obligation — to buy or sell an underlying asset (like a stock) at a specific price, on or before a certain date. They are used for speculation, income, or protection (hedging) against price movements.

Assignment occurs when the seller of an option is obligated to fulfill the terms of the contract. For a short Call, that means selling the stock at the strike price. For a short Put, it means buying the stock at the strike price. Assignment can happen at any time for American-style options, especially when options are in the money near expiration.

An options chain is a table showing all available option contracts for a particular stock, organized by expiration date and strike price. It displays key data like bid, ask, volume, open interest, and the Greeks. Traders use the chain to select and analyze options for their strategy.

A call option is a contract that gives the buyer the right to purchase a stock at a specific price (the strike price) by a set date. Buying a call (Long Call) is a bullish strategy. Selling a call (Short Call) is bearish or neutral, and carries risk if the stock moves sharply upward.

A put option gives the buyer the right to sell a stock at a specific strike price by a set date. Buying a put (Long Put) is bearish, while selling a put (Short Put) is bullish to neutral — often used to generate income or acquire shares at a lower price.

The strike price is the predetermined price at which the buyer of the option can buy (Call) or sell (Put) the underlying stock. It’s a critical element of the contract that determines whether the option is profitable (in the money) or not.

Expiration is the final date on which the option contract is valid. After this date, the option either gets exercised, expires worthless, or is closed. Traders must act before expiration or let the contract expire automatically.

ITM stands for "In the Money." A Call option is ITM if the stock is trading above the strike price; a Put is ITM if the stock is below the strike. These options have real, intrinsic value and are more expensive than out-of-the-money options.

OTM stands for "Out of the Money." A Call option is OTM if the stock is below the strike price; a Put is OTM if the stock is above the strike. These options have no intrinsic value — only time and volatility value.

Implied volatility (IV) is the market’s forecast of how much the underlying asset is likely to move in the future. Higher IV means the market expects bigger price swings, which increases option premiums. It’s a key input in option pricing models like Black-Scholes.

Theta represents the time decay of an option — how much value the option is expected to lose with each passing day, assuming all other factors stay the same. As expiration nears, Theta accelerates, especially for out-of-the-money options. Option sellers often benefit from Theta decay.

Delta is a measure of how much an option's price will change for every $1 move in the underlying stock. It also reflects the approximate probability of the option expiring in the money. A Call with a Delta of 0.60 has a 60% chance of finishing ITM and will gain $0.60 per $1 move in the stock.

Gamma measures the rate of change of Delta. As the stock price moves, Delta adjusts — and Gamma tells you how quickly. High Gamma means Delta can change rapidly, especially near the money and close to expiration, which can make trades more volatile and harder to manage.

Vega shows how sensitive an option’s price is to changes in implied volatility. If Vega is 0.10, a 1-point rise in IV would increase the option’s price by $0.10. Options with more time to expiration are generally more affected by changes in IV.

Rho measures how much an option’s price changes in response to a 1% change in interest rates. While often ignored in short-term trades, Rho can impact longer-dated options or LEAPS, especially in environments where interest rates are rising or falling rapidly.

IV crush refers to the sudden drop in implied volatility that often happens right after an anticipated event — like earnings — passes. Option premiums fall quickly, even if the stock moves, because the “uncertainty premium” is gone. Traders who bought options before the event often lose value fast.

A credit spread is a defined-risk options strategy where you sell one option and buy another (at a different strike) for a net credit. You keep the credit if the trade finishes out of the money. Popular examples include the bull put spread and bear call spread.

A debit spread is an options strategy where you buy one option and sell another to reduce the cost of the trade, resulting in a net debit. It's a defined-risk trade that profits from directional movement. Examples include bull call spreads and bear put spreads.

A vertical spread involves buying and selling options of the same type (Calls or Puts), with the same expiration date, but at different strike prices. It’s called “vertical” because the strikes are vertically aligned on the options chain. The trade can be bullish or bearish depending on the setup.

An iron condor is a neutral options strategy made by combining a call credit spread and a put credit spread — both out-of-the-money. It profits when the stock stays between the two spreads, allowing both to expire worthless. This strategy benefits from time decay and low volatility.

A butterfly spread is a low-cost, defined-risk strategy that profits if the stock closes near a specific middle strike at expiration. It involves buying one lower strike, selling two middle strikes, and buying one higher strike — all with the same expiration. The maximum profit occurs when the stock pins the center strike.

A straddle involves buying a Call and a Put at the same strike and expiration. It’s a neutral strategy that profits from large price movement in either direction. Traders use straddles when they expect volatility but are unsure of direction — like before earnings or a news event.

A strangle is similar to a straddle but uses different strike prices. It involves buying an out-of-the-money Call and Put with the same expiration. This strategy is cheaper than a straddle but requires a bigger move to profit, making it a directional volatility play.

A calendar spread involves selling a short-term option and buying a longer-term option at the same strike. It’s a neutral-to-directional strategy that profits from time decay of the front option and increased implied volatility. It can be tailored for bullish, bearish, or sideways expectations.

A covered call is created by selling a Call option against 100 shares of stock you already own. It’s a neutral-to-bullish income strategy that allows you to collect premium while slightly limiting upside potential. If the stock rises above the strike, it may be called away at expiration.

A cash-secured put involves selling a Put option while holding enough cash to buy 100 shares if assigned. It’s a bullish strategy used to generate income or acquire shares at a lower effective cost. If the stock falls below the strike at expiration, you’re obligated to buy the stock.

A poor man’s covered call replaces the expensive 100-share stock leg with a deep-in-the-money long-dated Call option (LEAP). You then sell shorter-term Calls against it to generate income. This synthetic covered call uses less capital and is ideal for smaller accounts.

The implied move is the market’s expected price movement of a stock over a specific period, often calculated from the options market. It’s derived using implied volatility and reflects the anticipated range — not direction — of the stock’s price. Traders often use it to gauge post-earnings risk or set up trades around volatility.

Probability of Profit (POP) is a stat that estimates the chance your trade will close with at least $0.01 in profit at expiration. It accounts for strike distance, volatility, and time. High POP doesn’t mean high reward — trades with higher POP usually offer lower potential returns.

While not designed as a probability, Delta is often interpreted as the approximate chance that an option finishes in the money. For example, a 0.20 Delta Call has about a 20% chance of being ITM at expiration. It’s not exact — but traders use it as a probability proxy.

Expected Value (EV) is a statistical concept that measures the average outcome of a strategy over many trades. It’s calculated by multiplying each possible outcome by its probability and summing the results. A positive EV means the strategy has a mathematical edge over time, even if individual trades lose money.

A statistical edge is a consistent, probability-based advantage that, when applied over many trades, leads to long-term profitability. It can come from favorable probabilities, asymmetric risk/reward setups, or exploiting market inefficiencies — but it must be repeatable and measurable.

Not necessarily. High-probability trades usually come with lower potential rewards and higher risk relative to return. For example, a credit spread might win 70% of the time but only yield a small gain. Low-probability setups often offer large payouts but win less frequently. It’s about balance and managing risk.

A trading plan is a written set of rules that guides your decision-making. It outlines when to enter and exit trades, how much to risk, which setups to trade, and how to respond to different market conditions. A good plan removes emotion and promotes consistency.

FOMO stands for "Fear of Missing Out." It’s a psychological trigger that causes traders to chase moves after they’ve already started — often leading to poor timing and undisciplined entries. Managing FOMO is key to avoiding impulsive, emotion-based trades.

Revenge trading happens when a trader tries to quickly win back a loss by taking new, emotionally-driven trades. It often leads to even larger losses due to impulsiveness and poor judgment. Walking away and sticking to your system is the best antidote to revenge trading.

Overtrading is placing too many trades, often out of boredom, frustration, or the illusion of opportunity. It increases transaction costs and emotional fatigue, while reducing overall trade quality. Fewer, high-quality setups usually outperform constant activity.

Position sizing determines how large each trade should be based on your account size, risk tolerance, and strategy. It’s a key part of risk management. For example, risking 1% of your account per trade helps prevent large drawdowns and keeps you in the game long-term.

The 1% rule is a guideline suggesting that you should never risk more than 1% of your total account value on a single trade. This approach protects your capital and allows for many opportunities to recover from losses without emotional or financial damage.

Defined risk means your maximum possible loss on a trade is known in advance and cannot be exceeded. Many options strategies, like spreads and butterflies, are defined-risk trades. This is in contrast to undefined risk trades, where losses can theoretically be unlimited.

Undefined risk refers to trades where the potential losses are not capped. This includes positions like naked Calls or Puts, where sharp or unexpected moves can lead to large — or even unlimited — losses. These strategies require strict risk management and are not recommended for beginners.

Support is a price level where buying interest tends to emerge, helping to prevent further declines. It's often seen as a “floor” that prices bounce off of. Support levels can be based on past lows, moving averages, or psychological price zones.

Resistance is a price level where selling interest tends to appear, preventing further upward movement. It acts like a “ceiling” that prices struggle to break through. Resistance zones are commonly formed near past highs or key psychological levels.

A breakout occurs when price moves strongly beyond a key support or resistance level, often with increased volume and momentum. Breakouts can signal the start of a new trend and are commonly used as entry points by technical traders.

Consolidation is a market phase where the stock trades within a tight range, showing no clear trend. It often reflects indecision and occurs before major price moves. Consolidation can be a setup for breakouts or reversals, depending on what follows.

VWAP stands for Volume Weighted Average Price. It represents the average price a stock has traded at throughout the day, based on both volume and price. VWAP is widely used by institutions and traders as a benchmark to measure fair value and intraday sentiment.

A gap up occurs when a stock opens significantly higher than the previous day’s close. A gap down is when it opens much lower. Gaps are usually driven by news, earnings, or after-hours activity, and they often signal a shift in momentum or sentiment.

Volatility measures how much a stock’s price fluctuates over time. High volatility means large price swings, while low volatility means relatively stable prices. Traders often use volatility to select strategies, as it directly impacts option pricing and risk.

Implied volatility (IV) reflects the market’s forecast of how much a stock might move in the future. It's derived from current option prices and changes constantly based on supply, demand, and expectations. Higher IV generally means more expensive options and greater uncertainty.

Historical volatility (HV) measures how much a stock’s price has moved in the past, usually expressed as a percentage. It’s based on actual price data over a chosen period and helps traders compare past movement with current implied volatility to assess potential value in options.

IV Rank shows where the current implied volatility (IV) sits relative to its range over the past 52 weeks. An IV Rank of 80% means current IV is higher than 80% of the past year’s readings — indicating options are relatively expensive. It helps traders time entries based on volatility extremes.

IV crush is the sharp drop in implied volatility that often follows a major event like earnings, after the uncertainty is removed. This drop reduces option prices quickly — even if the stock moves — and can cause losses for buyers who held through the event expecting a big move.

Volatility skew refers to the uneven pricing of options across different strikes — typically, out-of-the-money (OTM) puts have higher implied volatility than OTM calls. This reflects market fear of downside risk and can influence strategy selection for spreads or hedging.

A volatility smile is a visual pattern on a chart where implied volatility is higher for deep in-the-money and far out-of-the-money options compared to at-the-money options. The curve resembles a smile and suggests that traders expect more extreme price movements on either end.

Puts often have higher implied volatility because of downside fear — traders buy puts to hedge or speculate on crashes. That demand raises their price and inflates IV. It’s a reflection of risk perception: the market tends to fear fast drops more than slow climbs.

Yes — you can trade volatility using instruments like the VIX, VIX futures, or volatility ETFs (like VXX or UVXY). You can also construct option strategies that target volatility itself, such as straddles, strangles, or calendars, where profits depend on how much the stock moves rather than direction.

Gamma risk refers to the rapid change in Delta as expiration nears, especially for near-the-money options. It can make positions hard to manage, as small moves in the stock cause big swings in Delta. This is especially risky for short option sellers heading into expiration.

A synthetic long position mimics owning a stock by buying a Call and selling a Put at the same strike and expiration. The payoff profile is nearly identical to holding shares, but with different margin requirements. It's often used to simulate ownership without tying up full capital.

A synthetic short position mimics shorting a stock by selling a Call and buying a Put at the same strike and expiration. It behaves like being short shares and is used when traders want bearish exposure without directly shorting the underlying stock.

An earnings play is a trade made specifically to profit from a company’s upcoming earnings report. Traders often use options to bet on volatility, direction, or both — with strategies like straddles, strangles, or iron condors. Earnings plays involve elevated IV and potential for big moves.

Only if you fully understand the risks. Holding options through earnings means facing high implied volatility and sudden price swings. Even if you're right on direction, IV crush can destroy premium. Know your strategy and risk tolerance before holding through the event.

The safest way is to use defined-risk trades like iron condors, vertical spreads, or calendars — and keep your position size small. Focus on setups that benefit from expected volatility changes, and always assume price can move beyond expectations.

A “lotto play” is a very cheap, high-risk option trade — usually bought close to expiration with the hope of a big, fast move. These trades have low probability but high potential payoff, similar to buying a lottery ticket. Never risk more than you’re willing to lose completely.

An iron butterfly is a neutral, defined-risk options strategy made by selling a Call and a Put at the same strike (the body) and buying a farther out-of-the-money Call and Put (the wings). You collect a credit and profit most if the stock closes near the short strike at expiration.

A broken wing butterfly is a variation of the standard butterfly where one “wing” (long strike) is placed farther out than the other. This shifts the risk/reward profile and can often be set up for a small credit. It allows for directional bias while keeping risk defined.

A back ratio spread involves selling one option and buying two further out-of-the-money options of the same type (Call or Put). It creates a directional trade with limited risk in one direction and unlimited or larger profit potential in the other. Often used when expecting a big move.

A diagonal spread combines different strike prices and different expiration dates. It’s similar to a calendar spread but with a directional twist. Traders use diagonals to benefit from time decay, volatility shifts, and price movement — all in one flexible strategy.

A double diagonal combines a Call diagonal and a Put diagonal into one trade. It’s a four-leg setup that profits from time decay and volatility expansion. Ideal when you expect a stock to stay within a range short-term, but volatility to increase.

A risk reversal involves selling a Put and buying a Call — usually out-of-the-money and with the same expiration. It creates a bullish position that mimics a synthetic long, often used when traders want upside exposure without using much capital. Can also be reversed for bearish trades.

A reverse iron condor is a debit version of the traditional iron condor. Instead of selling two credit spreads, you buy two debit spreads — one Put spread and one Call spread. It profits if the stock makes a large move in either direction, making it ideal for high-volatility events.

Gamma scalping is an advanced options technique used to profit from intraday price swings by continuously adjusting (or “scalping”) the Delta of a position. Traders typically start with a long Gamma position (like long straddles) and buy low/sell high in the underlying as Delta shifts — capturing profits while neutralizing risk.

Pin risk happens when a stock finishes right at or very close to an option’s strike price at expiration. It creates uncertainty about whether the option will be assigned or not, leaving you with unintended long or short positions the next trading day. It’s a key risk for traders holding short options into expiration.

A tail hedge is a protective trade designed to profit from extreme market events — also known as “black swan” events. Traders often buy far out-of-the-money Puts or VIX Calls to hedge against rare but devastating market drops that could severely damage a portfolio.

Theta decay is the erosion of an option’s value as time passes. It's especially aggressive in the final week before expiration. Options lose value every day — even if the stock doesn’t move — which is why sellers often benefit from time decay while buyers must overcome it.

A calendar roll means closing an existing option and opening a new one with the same strike but a later expiration. Traders often roll calendars to keep time premium exposure or to adjust to upcoming volatility events while maintaining their original price thesis.

A time bomb trade uses very short-dated options with high Gamma — meaning they are extremely sensitive to price movement. These trades can explode in value with even small moves but also lose value rapidly if nothing happens. They’re often used as speculative plays just before expiration.

A super-condor is a variation of the iron condor that uses wider wings and sometimes overlays additional spreads (like diagonals or calendars) to absorb movement or take advantage of volatility. It’s often used in low-volatility markets to collect more premium while extending the safe range.

A skew hedge takes advantage of the volatility skew — the pricing difference between OTM Calls and Puts — to reduce directional risk. It often involves selling rich (high-IV) options and buying cheaper ones to offset exposure. Skew hedging is common in strategies like ratio spreads or broken wings.

Delta neutral means the overall position has a Delta close to zero — meaning it's not biased bullish or bearish. The position should theoretically stay flat as the stock moves slightly. Traders use Delta-neutral setups to profit from volatility, time decay, or other Greeks rather than directional moves.

Vega risk is the sensitivity of an option’s price to changes in implied volatility. Long-dated options (like LEAPS) have high Vega and are more affected by IV changes. If IV drops, Vega risk hurts long options; if IV rises, it benefits them. Managing Vega is crucial in trades like calendars, diagonals, or long premium plays.

Rho measures how sensitive an option's price is to changes in interest rates. While usually a minor factor in short-term options, it becomes more relevant in longer-dated options. For every 1% change in interest rates, Rho shows how much the option's price will increase or decrease. Rising rates generally increase Call prices and decrease Put prices.

A strangle crush occurs when a trader buys a strangle expecting a big move, but both implied volatility and price movement fall short. The result is a rapid decline in both options' value due to time decay and IV crush — causing the position to lose value quickly, even if direction was guessed correctly.

A directional bias is a trader’s belief or data-driven expectation that a stock will move either up (bullish) or down (bearish). This bias helps guide trade selection — for example, choosing a Put credit spread in a bullish environment. While helpful, it must be backed by logic or strategy, not emotion.

A net credit occurs when a trade puts money into your account at entry. This happens when the premium collected from selling options exceeds the cost of any options bought. Strategies like credit spreads, iron condors, and covered calls typically generate net credits and aim to profit from time decay or staying out-of-the-money.

A net debit means the trade costs you money to enter. It occurs when the premium paid for the long option(s) is greater than any premium received from short option(s). Debit spreads, long calls, and long puts are all net debit strategies — they typically require a move in your favor to become profitable.

Liquidity refers to how easily a stock or option can be bought or sold without causing a significant price change. Highly liquid options have tight bid/ask spreads, high volume, and lots of open interest. Liquidity is essential for getting fair fills and reducing slippage.

A wide bid/ask spread means there’s a large difference between what buyers are willing to pay (bid) and what sellers are asking (ask). It’s a sign of poor liquidity, making it harder to get a good fill and increasing the cost of entering or exiting the trade. Traders usually avoid these unless absolutely necessary.

Illiquid options come with wider spreads, lower volume, and fewer counterparties. This increases slippage, slows down execution, and can result in paying more or selling for less than expected. Lack of liquidity can also make exiting a trade difficult, especially during fast market moves.

Slippage is the difference between the price you expect to get on a trade and the actual price you receive. It often occurs in fast-moving or illiquid markets and can eat into your profits — especially if you're placing market orders instead of limit orders. Tight bid/ask spreads help reduce slippage.

Open interest is the total number of active option contracts that haven’t been closed, exercised, or expired. It reflects how much attention a particular strike and expiration is getting. High open interest usually means better liquidity and easier trade execution.

Volume shows the number of option contracts traded during the current session. It resets daily and reflects trader activity, but it’s different from open interest, which tracks total existing contracts. High volume can indicate strong interest or momentum in a particular strike or expiration.

A breakout trade is triggered when price moves decisively above resistance or below support — signaling possible trend continuation. Traders often enter on volume confirmation, aiming to catch momentum as the price escapes a previous range or consolidation zone.

A reversal setup is a trade that anticipates a change in direction — often after a strong move or extended trend. These setups look for signs like overbought/oversold conditions, divergence, candlestick signals, or key support/resistance levels to catch a potential turning point.

A trend is a sustained directional move in price — either upward (bullish) or downward (bearish). Trends often show higher highs and higher lows (uptrend) or lower highs and lower lows (downtrend). Trend-following strategies aim to ride these moves for extended gains.

A mean reversion trade bets that price will return to its average (mean) after moving too far in one direction. It’s based on the idea that price extremes are often temporary. These trades are common after sharp spikes or dips and often use indicators like RSI or Bollinger Bands.

A price channel is a range where price moves consistently between parallel support and resistance levels. Channels can be horizontal, ascending, or descending. Traders use channels to identify entries near support and exits near resistance — or to catch breakouts when the channel ends.

A volatility contraction is a period when price action tightens and implied volatility shrinks. It signals indecision or consolidation and often precedes a breakout. Traders watch for these squeezes as setups — expecting an expansion in range and volatility to follow.

The theta decay curve shows how an option’s time value erodes over time — and it’s not linear. Decay accelerates as expiration approaches, especially in the final two weeks. This curve helps traders understand when time decay is working hardest — often benefiting sellers more than buyers.

Time-based risk refers to all the uncertainty that comes with simply holding a position over time. It includes theta decay, news events, earnings surprises, overnight gaps, and market sentiment shifts. Even if your analysis is correct, time itself can introduce new risks.

The earnings implied move is the expected price change — up or down — derived from the option market ahead of a company’s earnings report. It’s calculated using implied volatility and straddle pricing, giving traders a forecast of how much the market expects the stock to move after the announcement.

A neutral strategy is designed to profit when the stock stays within a certain range. These setups don’t require big directional moves. Examples include iron condors, calendar spreads, and butterflies — all of which benefit from time decay and low volatility.

A directional strategy profits when the stock moves in a specific direction — up or down. Examples include long calls (bullish), long puts (bearish), vertical spreads, and naked options. These trades often need strong movement to overcome time decay and slippage.

The maximum loss on a vertical spread is the difference between strike prices minus the net premium collected (credit spread) or plus the premium paid (debit spread). This amount is known up front and defines the worst-case scenario for the trade.

For credit spreads, max profit is the premium you collect when opening the trade — if both options expire worthless. For debit spreads, max profit is the width between strikes minus what you paid — achieved if the spread goes fully in the money at expiration.

Assignment risk refers to the chance that your short option gets exercised before expiration — usually due to dividends or when it’s deep in the money. This can lead to unexpected long or short stock positions, especially in American-style options which can be exercised at any time.

Exercising an option means using your contractual right to buy (Call) or sell (Put) the underlying stock at the strike price. Option buyers can choose to exercise before or at expiration, but most retail traders close the position instead of exercising it.

At expiration, options either expire worthless or get exercised/assigned depending on the stock’s price relative to the strike. In-the-money options may be automatically exercised, while out-of-the-money options simply disappear with no value.

Yes. Even if an option expires in the money, you can still lose money if the intrinsic value is less than the premium you paid to open the trade. This is common with expensive options or debit spreads that don't reach max value.

Intrinsic value is the real value of an in-the-money option — how much it would be worth if exercised immediately. For a Call, it’s the stock price minus the strike. For a Put, it’s the strike minus the stock price. Options with no intrinsic value are called out-of-the-money.

Extrinsic value (also called time value) is the portion of an option’s price that comes from time remaining and implied volatility — not its intrinsic value. All out-of-the-money options are 100% extrinsic, and even in-the-money options carry extrinsic value until expiration.