1.

Defining Options & Key Terms

2. Call Option Introduction
3. Exercising an Option
4. Buying a Call: Risk Graph
5. Put Option Introduction
6. Buying Puts vs. Shorting Stock
7. Intrinsic & Extrinsic Value
8. Option Moneyness (ITM, ATM, OTM)
9. How Shorting Options Works
10. Short Calls Explained
11. Short Puts Explained
12. Exercise & Assignment (Further Details)
13. Mastering Implied Volatility
A stock option is a financial tool that allows the
owner the right to buy/sell 100 shares of stock
at a fixed price before a specified date.
Every option has a strike price, expiration
date, and contract multiplier.

We need to learn these terms to understand

option prices and what options represent.
The strike price is the specified price at which an option
owner can buy/sell the asset the option is tied to.

If I own a call option with a strike price of $125, I have the

right to buy stock at $125, no matter what the stock does.

Strike Price = $125

Stock Price
The expiration date is the final day an option exists and
can be traded. An option's final value is determined on
the expiration date.

If I own a call with a strike price of $125 that expires in 30

days, I can only use the call to buy shares at $125 for 30
days.

Strike Price = $125

A single share of stock with a price of $120 can be purchased with $120
in cash. Options are different.

If an AAPL option is listed at $5.00, I need $500 to buy the option.

That's because "standard equity options" (options on AAPL, TSLA,

GOOGL, etc.) can buy/sell 100 shares of stock at the strike price.
 The call option in this image has
a price of $1.52, requiring $152 in
available funds to purchase.

Price: $1.52
Cost/Value: $152

Here's how to interpret the difference between the option's listed price and its actual cost:

For a cost of $1.52 per share, the contract can buy 100 shares of stock at the strike price. If we pay a
$1.52 per-share "fee" for the right to buy 100 shares at the strike price of $10, we pay $152.
I know it's a lot to take in, but these key terms are the foundation of
understanding options and their valuations. Let's recap them:

Strike Price
The specific price an option can buy/sell shares at, no matter how high or low the stock
price goes.

Expiration Date
The final day an option ceases to exist and can be traded. The expiration date gives our
options trades a time limit.

Contract Multiplier x100

The number of shares the option can buy/sell. For standard stock options the multiplier
is 100. We multiply the listed price by the multiplier to get the option's cost/value.
Exercise
Exercising an option is when the holder of an option chooses to buy (in case of a call
option) or sell (in case of a put option) 100 shares of stock at the strike price. It's like using
a special coupon to buy or sell something at a price you locked in earlier.

Assignment
Option owners have the right to exercise their options. For every option owner, there is a
"short" option trader who is on the other side of the trade.

When an option is exercised, a trader who is short that option is "assigned" shares of
stock at the option's strike price.

Don't worry too much about exercise and assignment right now.
We'll talk more about exercise and assignment throughout the lessons.

For now, it is enough to understand that options allow the owners to buy/sell 100 shares
of stock at the strike price before the expiration date.

If a call or put owner wants to use their option to buy/sell shares at the strike price, it is
called exercising the option.

Option prices stem from the value of the ability to exercise the option and buy/sell shares
at the option's strike price. Or, the potential value of that ability in the future.
There are two types of options: call options and put options.

A call option can be used by the owner to buy 100 shares of stock at the strike
price on or before the expiration date.

The value of this ability will grow as the stock price increases further above the
call's strike price:

Call Strike Price

I am interested in this house Instead, I'm going to buy a call
because I think it will increase in option on this house that gives me
value, but I don't want to pay the the right to buy the house for
full $200,000 right now. $200,000 within the next 2 years.

I'll pay $10,000 for this option.

Current Price Strike Price: $200,000

$200,000 Expiration: 2 Years from Today
Option Cost: $10,000
Strike Price: $200,000 I own a call option that allows me to buy the house at
Expiration: 2 Years from Today the strike price of $200K, but the house is now worth
$350K...
Option Cost: $10,000
I can "exercise" my option, meaning choose to buy
the house for $200K.

Purchase Price: $200,000

Asset Value: $350,000
Net Profit: +$150,000 - $10,000 Option Cost = +$140K

Initial Price Price After 1 Year

$200,000 $350,000
Strike Price: $200,000 If the house falls in value, I don't have to use the
Expiration: 2 Years from Today option at all.
Option Cost: $10,000
My option gives me the right, not the obligation, to
buy the house at the strike price of $200K.

That's why it's called an option.

Loss: -$10,000 Option Cost

Initial Price Price After 2 Years

$200,000 $150,000
Note how I would have lost $50,000 if I purchased the
house for $200K and it fell to a value of $150K.

If I bought the option for $10K and ended up not using it

because it didn't provide any value, I only lose $10K.

Initial Home Price After 2 Years

Price $150,000
$200,000 -$50,000

Initial Option
Price Price After 2 Years
$10,000 $0
-$10,000
Let's look at a real call option to bridge the gap from a
simple house option example to equity options.
 Stock: Tesla (TSLA) I know there's a lot here! Don't
worry, it'll become much more
familiar as you gain experience.

Let's walk through this option's

Expiration: Days to Expiration: 167 details on the next slide, then
January 19th, 2024 look at its historical
performance.
Call Strike Price: $100
Call Cost/Value:
$15,690

Call Price: $156.90

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 Stock: Tesla (TSLA)
Expiration: January 19th, 2024
Days to Expiration: 167
Call Strike Price: $100
Call Price: $156.90
Call Cost/Value: $15,690

A trader who buys this call gains the right to purchase 100 shares
of TSLA stock at $100/share on or before the expiration date of
January 19th, 2024.

For this ability, a new trader would need to pay $15,690 at the call's
current price.
But TSLA's stock price has gone up a lot in 2023...

Was the call's value always $15,690?

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 At the beginning of 2023, TSLA shares
were trading for a little over $100.

Stock Price The 100-strike call expiring in January

2024 had a year until expiration.

The call's price was near $35 (a total

cost/value of $3,500).

As TSLA shares rose further above the

call's strike of $100, the 100-strike call
gained value as well.

Why? Its ability to purchase shares at

Call Price a bigger discount to the stock price
became more valuable.

And when the stock price came back

down, so did the value of the call's
ability to buy stock at $100.
 Key Takeaways:

1) Note how the call price goes up

Stock Price with the stock price because the
value of buying shares at $100 (the
call strike) changes as the stock price
changes.

2) Option prices change every day as

the stock price changes. You can
buy/sell options whenever the market
is open.

You could have bought the call at the

Call Price beginning for $3,500 and sold it a few
weeks later for $5,000, making a
$1,500 profit.

Or, you could have bought it for

$12,500 at 338 DTE and sold it for
$7,500 at 266 DTE, losing $5,000.
As mentioned, exercising an option refers to using the option to
buy/sell shares of stock at the option's strike price.

For instance, if we own the 100-strike TSLA call, exercising the call
would mean using the option to buy 100 shares of stock at $100/share.

We would purchase 100 shares of stock at the strike price of $100.

The call option in our account would be replaced by +100 shares of

stock with a purchase price of $100.
I rarely talk about exercising options because options traders rarely
exercise their options...

Instead, they buy and sell the options at different times with the
goal of profiting from the price change of the option.

But it's still important to understand exercising options because the

ability to do so is what gives an option its value.
For instance, in the TSLA example, we wouldn't necessarily buy the 100-
strike call with the intention of actually buying 100 shares of TSLA at
$100/share.

Traders would buy the call because they think TSLA shares will surge,
resulting in a more valuable call option. Then, they could sell the option
for a higher price and make a profit, JUST like trading shares of stock.

Stock Buyer Goal: Buy shares low and sell shares high (+$$$)
Option Buyer Goal: Buy options low and sell options high (+$$$)
 A TSLA options trader who thinks the
stock will surge can buy calls to make
more money than simply buying
shares.
Stock Price
For example, it would have cost $11,000
to buy 100 shares of TSLA at the
beginning of this chart period.

It would have cost $3,500 to buy the

100-strike call expiring in January 2024.

Stock Price Change (381 - 338 DTE)

~$110 to $210 (+91% Gain)
Call Price
Call Price Change (381 - 338 DTE)
~$35 to $125 (+257% Gain)

Options traders buy/sell options instead

of stock because the options can see
much larger returns compared to the
stock price, but they come with more
risk, too.
Call Option Recap: A call option gives the buyer the right to buy 100 shares of stock
at the fixed strike price before the option's expiration date.

As the stock goes up, the value of the call's ability to buy shares at that fixed
price will also go up.

The trader can simply sell their call option position for a higher price, realizing a profit
on the option price increase.

There's always the option to exercise the call and actually buy shares at the strike
price, but traders rarely do that.

Stock Price
Call Price
Call Strike Price
An option's price will ALWAYS include the benefit/gain that it can provide the owner
if they were to exercise the option.

TSLA Call Strike Price: $100

TSLA Stock Price: $225

I can use the call option to make a $125 profit per share by exercising the option,
buying 100 shares for $100/share, then selling the shares for $225.

Because of this, the call option MUST be worth $125, or have a cost/value of $12,500,
since it can give me a $125 per-share profit on 100 total shares.

Let's verify this by going back to the TSLA call chart once again!
 The stock is at $150.
The 100-strike call is worth over $50.

The stock is at $200.

The 100-strike call is worth over $100.

Stock Price
The stock is at $275.
The 100-strike call is worth over $175.

In each instance, the 100-strike call is worth AT

LEAST the per-share profit that an owner of the
option can gain by purchasing shares at the
strike price (exercising the call) and selling the
shares at the current stock price.

So option prices ALWAYS include the profit the

Call Price owner can gain by exercising the option and
closing the shares at the current stock price.

Because of this, we don't need to exercise

the option to realize that gain. We can
simply sell the option.
 Stock Price = $253.86

Call Strike: $220 The call price is greater than the $33.86 per-
share profit it can provide the option owner
(buying shares at the strike of $220 and selling
Call Price: $38.95 them at the stock price of $253.86).

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 Stock Price = $139.57

Call Strike: $100

The call price is greater than the $39.57 per-share profit it
can provide the option owner (buying shares at the strike
of $100 and selling them at the stock price of $139.57).

Call Price: $41.05

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 Stock Price at Entry: $250
Call Strike Price: $250
At expiration, a call option will expire Time to Expiration: 60 Days (60 DTE)
worthless if the stock price is at/below Initial Call Price: $5.54 ($554 Cost/Value)
the strike price.

The maximum loss in that scenario is

the amount paid for the option initially.

The maximum profit of a call purchase

is theoretically unlimited because the
call price will go up with the stock
price, and there's no limit to how high
a stock's price can go. Call Strike
Price Price

Stock Price
 This is a simulated "risk graph" of
buying a 250-strike call option.

It shows the simulated prices of the call

option at various stock prices and with
Strike
various amounts of time until
Price
expiration (days to expiration or DTE).

Call As we saw in the TSLA example, the

price of the call increases and
Price
decreases with the stock price.

But at expiration, the call option will

be worthless if the stock price is at or
below the strike of $250.

Stock Price
 At expiration, a call is worthless if the
stock is at/below the call's strike
because there's no value in the call's
ability to buy stock at the strike price.
Strike
Price Ex: if the stock is at $240 at
expiration, we can just buy stock at
the market price of $240, a more
Call favorable price than the call's $250
Price strike price.

Since there's no more time for the

stock to increase and make the call
valuable, it expires with a final value
of $0.

Stock Price
 Here I've changed the Y-axis to show the
P/L of the call purchase if we were to buy
the 250-strike call when it had 60 days to
expiration. The stock was at $250 at the
time of entry. The simulated call price at
entry was $5.54.

If the stock doesn't increase, we'll lose

money on the trade as time passes (we'll
talk more about this later).

The max loss is the amount paid for the

P/L
option initially, which was $554.

The breakeven stock price at

expiration is $255.54, which is the strike
Max Loss Potential: -$554
price plus the initial option purchase
price.
Stock Price
The max profit is theoretically unlimited
as the call price goes up with the stock
price.
 Initial Stock Price: $214
Call Strike: $225
Expiration: April 21, 2023
Days to Expiration (DTE): 65
Option Purchase Price: $21.38
In this example, the stock price begins
at $214 on February 15th, 2023.

Stock Price The call strike price is $225.

As the stock price trended lower and

time passed, the 225 call's value
plummeted as it became less likely for it
to be valuable at the time of expiration.

It expired worthless as the stock price

was at $165 at expiration.
Call Price
There's no value in the 225 call's ability
to buy stock at $225 when the stock
price is at $167.

And since the option reached

expiration, there was no more time for
the stock price to increase to make the
call valuable.
$10,000 in Shares $7,700

$10,000 in Calls $0
 Put Strike Price
Put Price
Stock Price
 Stock Price at Entry: $250
Call Strike Price: $250
At expiration, a put option will expire Time to Expiration: 60 Days (60 DTE)
worthless if the stock price is at/above Initial Call Price: $6.56 ($656 Cost/Value)
the strike price.

The maximum loss in that scenario is

the amount paid for the option initially.

The maximum profit of a put purchase

is the strike price - the purchase price
of the put because the stock can only
Strike
go to zero.
Put Price

If the stock goes to zero, we can sell Price

shares at $250, making a $250 profit
per share. Since we paid $6.56 for the
put, our per-share profit is $250 - $6.56
= $243.44.

Stock Price
 At expiration, a put is worthless if the
stock is at/above the put's strike
because there's no value in the put's
ability to sell stock at the lower strike
price.

Ex: if the stock is at $260 at expiration,

Put
we can just sell stock at the market
Price
price of $260, a more favorable price
than selling at the put's $250 strike
price.

Since there's no more time for the

stock to fall and make the put valuable,
it expires with a final value of $0.

Stock Price
 Here I've changed the Y-axis to show the
P/L of the put purchase if we were to buy
the 250-strike put when it had 60 days to
expiration. The stock was at $250 at the
time of entry. The simulated put price at
entry was $6.56.

If the stock doesn't fall, we'll lose money

on the trade as time passes (we'll talk
more about this later).

P/L
The max loss is the amount paid for the
option initially, which was $656.

The breakeven stock price at

Max Loss Potential: -$656 expiration is $243.44, which is the strike
price MINUS the initial option purchase
price.
Stock Price
The max profit potential is the strike -
price paid, or $243.44, which occurs if the
stock goes to zero.
 For all intents and purposes, the maximum
profit potential of a put purchase is
Max Profit Potential: "unlimited" as we'll make more money as
Potential: +$24,344 the stock price falls.

However, there is technically a limit since

the stock can only go to zero.

If we buy a 250-strike put for $6.56, our max

profit potential is +$24,344:
P/L
Buy 100 Shares for Zero
Pay $0

Exercise Put to Sell 100 Shares @ $250

Receive $25,000

Stock Price Initial Option Cost: $656

Net P/L: +$25,000 - $656 = +$24,344
 Initial Stock Price: $214
Put Strike: $200
Expiration: April 21, 2023
Days to Expiration (DTE): 65
Option Purchase Price: $17.55
In this example, TSLA shares begin at $214
on February 15th, 2023.

Stock Price The put strike price was $200.

Stock Price Change: -23% Note how the put price surged initially as
the stock price plummeted towards $170.

Option Price Change: +100% Why? Because the ability to sell shares at
$200 (via the put) grew in value as the
Put Price
shares fell further below $200.

The shares continued to whipsaw, causing

wild swings in the put's value, inversely to
the stock price.

Expiration: With the stock price at $165, the

put was worth a final value of $35. A trader
who bought the put for $17.55 could have
sold the put at exp. for $35.
 Initial Stock Price: $113.64
Put Strike: $100
Expiration: March 17, 2023
Days to Expiration (DTE): 72
Option Purchase Price: $8.83
In this example, TSLA shares begin at $113.64
on January 4th, 2023.
Stock Price
The put strike price was $100.

In this example, the stock price rallied hard

over the entire period, and the put value
declined steadily to zero.

As the stock got further above the put

strike, and expiration got closer, it became
Put Price less likely the put would become valuable
by expiration.

Expiration: With the stock price at $180, the

put was worth a final value of $0. A trader
who bought the put for $8.83 initially and
held to expiration would have lost the entire
$883 premium paid (for each put).
P/L

Buying puts has limited loss potential if the stock price surges.
Shorting stock has unlimited loss potential.

Stock Price
 Stock Price

Call Does NOT Have Call Has

Intrinsic Value Intrinsic Value

Call Strike Price

 If the stock price is $225...

Call Strike Intrinsic Value

$125 $100 A call option has intrinsic value if

the stock price is above its strike
$150 $75 price because the call can buy
shares below the current stock
price.
$200 $25

$225 $0
Call's with strikes above the stock
price have zero intrinsic value.
$250 $0
 Put Does NOT Have
Intrinsic Value

Put Strike Price

Stock Price
Put Has
Intrinsic Value
 If the stock price is $100...

Put Strike Intrinsic Value

$80 $0
Puts with strikes below the stock
price have zero intrinsic value.
$100 $0

$120 $20 A put option has intrinsic value if

the stock price is below its strike
$135 $35 price because the put owner can
sell shares above the current
$140 $40 stock price.
The 270 put has $12.50 of intrinsic value
with the stock price at $257.50 because the
put owner can exercise the put and sell
shares $12.50 above the stock price.

But the put is worth $22.50.

The additional $10 of value above its
intrinsic value is the extrinsic value.
Extrinsic value in option prices comes from the amount of time
until expiration and expected stock volatility.

= Extrinsic Value

More specifically, the combination of time and volatility is what

drives extrinsic value levels in options, as stock price changes
happen over time.
Let's look at a historical AAPL call option that was
valuable despite never having any intrinsic value.
 Initial Stock Price: $131.56
Call Strike Price: $180
Expiration: December 16th, 2022
Days to Expiration (DTE): 182
Starting Call Price: $1.25
Never had intrinsic value

Knowing that call options only have

intrinsic value when the stock price
exceeds the strike price, this 180-strike
call option never had any intrinsic value.

Despite having no intrinsic value, the call

price went up 7.5x, from $1.25 to $9.40 at
the high point when AAPL shares hit $175
when the call had about 122 days left
The call still surged 7.5x
until expiration.
during the stock rally...
Why?
 Initial Stock Price: $131.56
Call Strike Price: $180
Expiration: December 16th, 2022
Days to Expiration (DTE): 182
Starting Call Price: $1.25
Stock price increasing rapidly
towards the call strike.
Because the probability of the stock
getting above the call's strike price
increased as the stock price went from
$132 to $175.

Call price surging in response to the

higher probability of becoming
intrinsically valuable before expiration.
Still 122 days to expiration...
At expiration, an option will only be worth its intrinsic value.

If the option has no intrinsic value at expiration, it is worthless ($0.00).

As we saw in the AAPL example, the option's extrinsic value went up and
down as its probability of expiring in-the-money (with intrinsic value) went up
and down. Ultimately, the option price trended toward its intrinsic value,
which was zero.
 Stock Price = $150
Intrinsic of 145 Call: $5
Intrinsic of 150 Call: $0
$5 of intrinsic value

The 145-strike call has $5 of intrinsic

value with the stock at $150, while
the 150 call's price is purely extrinsic.

As expiration approaches, each

call's price trends towards its
100% Extrinsic Value intrinsic value.
 Stock Price = $150
Intrinsic of 157.5 Put $7.50
Intrinsic of 150 Put: $0

The 157.50-strike put has $7.50 of

intrinsic value with the stock at
$7.50 of intrinsic value
$150, while the 150 put's price is
purely extrinsic.

As expiration approaches, each

put's price trends towards its
100% Extrinsic Value intrinsic value.
Option prices consist of intrinsic value and extrinsic value.

Intrinsic value is the "tangible" price portion of an option - it represents the gain from
exercising the option and closing the resulting stock position.

The call below has $15 of intrinsic value since the call owner can buy shares $15 below
the current stock price by exercising the call, which could then be sold at the stock
price of $150 to make a $15 gain per share.

Stock Price: $150

Call Strike: $135
Call Intrinsic Value: $15
But if an option has no intrinsic value, it can still be valuable via extrinsic value.

If there's lots of time left until expiration, and/or the stock has high volatility, there's still
a chance the stock price can make a big move before the option expires and leave the
option intrinsically valuable (as we saw in the AAPL call example).
At expiration, an option's price will ONLY consist of intrinsic value (if any).

Extrinsic value is lost over time, and will be gone entirely at expiration.

So if you buy options, you need the options you own to reach intrinsic value levels equal
to or greater than your purchase price to not lose money AT expiration.

Call Purchase Price: $13

Call Strike Price: $200

You need the stock price to be at or above $213 at the time of expiration for the call to
have $13+ of intrinsic value.

Before expiration, you can still make money on the trade and exit it profitably if the
option price increases from your purchase price (again, see AAPL call example).
There are three "moneyness" options trading terms that describe an option's strike
price in relation to the stock price.

In-the-Money (ITM)

An option that has intrinsic value.

At-the-Money (ATM)

An option with a strike price at/near the stock price.

Out-of-the-Money (OTM)

An option with no intrinsic value. OTM options consist of 100% extrinsic value.
 Stock Price = $423.88

In-the-Money Calls In-the-Money Puts

Strikes Below $423.88 Strikes Above $423.88

Calls with strike prices below the stock

prices have intrinsic value and are ITM.

Puts with strikes above the stock price

have intrinsic value and are ITM.
 Stock Price = $423.88

With the stock price at $423.88,

the "at-the-money" or ATM calls
and puts are the 425 strike.
At-the-Money Strike = $425
 Stock Price = $423.88

OTM Calls OTM Puts

Strikes Above $423.88 Strikes Below $423.88

Calls with strike prices above the stock price

have no intrinsic value and are OTM.

Puts with strikes below the stock price have

no intrinsic value and are OTM.
Since options at expiration will
have no extrinsic value remaining,
only ITM options will be valuable
at expiration.

With the stock price at $100, only

ITM call options (strike prices
below $100) will be valuable at
expiration.
Since options at expiration will
have no extrinsic value remaining,
only ITM options will be valuable
at expiration.

With the stock price at $100, only

ITM put options (strike prices
above $100) will be valuable at
expiration.
Thus far, we've talked exclusively about buying calls and puts.

But for every buyer, there is a seller.

Trader can "short" stocks, which means to sell shares of stock they don't own.

Traders can "short" options, which means to sell an option without owning it first.

Short traders are betting against the price of the asset they short.

If I short a stock, I make money if the stock price falls because I can then buy it back
for a lower price.

If I short an option, I make money if the option price falls because I can then buy it
back for a lower price (or let it expire worthless).
Imagine a trader who wanted to bet against
the AAPL stock price rally in the previous
call option example.

The trader could have SHORTED a call

option.

Let's say the trader shorted the 180-strike

call option at the highlighted entry point.

They would have collected $600 into their

account for shorting the option.

The call's value increase to $9 would have

dealt them with an unrealized loss of $300
per contract.

The call ended up trading towards $0 in the

final months before the expiration, at which
point the trader could have bought back
the call for pennies on the dollar, making
$600 on the trade.
Short Call Trade Math

Shorted Call at $6
+$600 Into Account

Call Price Rises to $9

-$300 Unrealized Loss on Position
If I short a call for $600 and I buy it back for $900, I lose $300.

Call Price Falls to $0

+$600 Unrealized Profit on Position
If I short a call for $600 and I can buy it back for $10, I make $590.
If the call expires worthless, I make $600.
Shorting call options is an options strategy where you sell call options
you do not own.

Because call option prices fall as the stock price falls, shorting a call
option is a bearish strategy.

When shorting calls, you make money over time if the stock price
remains below the strike price of the call you sell.

The strategy has theoretically unlimited risk to the upside because

there is no limit to how high a stock's price can go.
 Entry Stock Price: $250
Short 260 Call Risk Graph (60 DTE) Call Strike: $260
Entry Call Price: $2.15
Entry DTE: 60 Days

In this simulation, we're looking

at shorting a 60-day, 260-strike
Entry Stock Price call with the stock price at $250.
Call Strike
P/L
The position profits when the
stock price falls, and/or is below
the call's strike of $260 at
expiration.

The short call strategy has

Stock Price theoretically unlimited loss
potential to the upside.
Entry Stock Price: $150.82
Call Strike: $155
Entry Call Price: $3.58
Entry DTE: 29 Days

In this simulation, we're looking at

shorting a 29-day, 155-strike call
with AAPL shares at $150.82.

The short call position loses

money initially as the stock heads
higher, but ultimately the stock
price fails to breach the 155 price
level over time.

At expiration, the 155 call expires

worthless. The short call trade
makes a final profit of +$358 per
call shorted.
Entry Stock Price: $153.83
Call Strike: $160
Entry Call Price: $3.15
Entry DTE: 46 Days

In this simulation, we're looking at

shorting a 46-day, 160-strike call
with AAPL shares at $153.83.

The short call position profits

initially as the stock heads lower,
but ultimately the stock price
heads higher than the 160 strike.

At expiration, the 160 call is worth

its intrinsic value of $5.02. The
short call trade makes a final loss
of -$187 per call shorted.
Entry Stock Price: $289.10
Call Strike: $320
Entry Call Price: $8.05
Entry DTE: 46 Days

The NVDA short call position

struggles out of the gates with the
stock price trending higher. Halfway
through the trade, NVDA shares blast
higher and run up to $426.92.

At expiration, the 320 call is worth its

intrinsic value of $106.92.

The short call trade experiences a

final loss of -$9,887 per call shorted.
Shorting put options is an options strategy where you sell put options
you do not own.

Because put option prices fall as the stock price rises, shorting a put
option is a bullish strategy.

When shorting puts, you make money over time if the stock price
remains above the strike price of the put you sell.

The strategy has significant loss potential to the downside.

 Entry Stock Price: $250
Short 240 Put Risk Graph (60 DTE) Put Strike: $240
Entry Put Price: $2.50
Entry DTE: 60 Days

In this simulation, we're looking

at shorting a 60-day, 240-strike
put with the stock price at $250.
Put Strike Entry Stock Price
P/L
The position profits when the
stock price rises, and/or is above
the put's strike of $240 at
expiration.

The short put strategy has

Stock Price significant loss potential to
the downside.
Entry Stock Price: $289.10
Put Strike: $320
Entry Put Price: $8.05
Entry DTE: 46 Days

The NVDA short put position

experienced some small early losses
as the share price fell, but the losses
were short-lived.

The stock price rallied hard and the

put price collapsed as it became
further OTM and time passed.

At expiration, the 275 put was worth

its intrinsic value of $0.

The short put trade experienced a

final profit of +$805 per put shorted.
 Keep in mind that option positions
can be closed at any time.

The 275 put was nearly worthless well

before expiration.

A trader who shorted the put for

$8.05 at entry could have bought the
put back (closed) for pennies weeks
before expiration, securing a near full
Short here profit on the trade.
Buy back here
Entry Stock Price: $214.24
Put Strike: $200
Entry Put Price: $17.55
Entry DTE: 65 Days

The TSLA short put position

experienced losses right away as the
share price fell.

The trade recovered as TSLA shares

rallied hard, presenting the short put
trade with some profits.

At expiration, the stock price was

$165.08 and the 200 put was worth its
intrinsic value of $34.92.

The short put trade experienced a

final loss of -$1,737 per put shorted.
Entry Stock Price: $222.38
Put Strike: $215
Entry Put Price: $4.23
Entry DTE: 57 Days

This QQQ short position experienced

healthy profits during the initial rally,
presenting an opportunity for the short
put trade to take big profits.

Unfortunately, QQQ cratered during the

2020 market crash, resulting in a massive
increase in the put price. At the high, the
put was worth $45, or 10x the put sale
price (unrealized loss of ~$4,100).

At expiration, the put was worth its

intrinsic value of $24.60.

The short put trade experienced a final

loss of -$2,037 per put shorted.
Now that we're talking about shorting options, it's time to talk more about
exercise and assignment.

Exercising an option is when the option owner (buyer) "uses" the option and
buys/sells 100 shares of stock (per option) at the option's strike price.

Exercising the option effectively converts the option into a stock position with an
entry price equal to the strike price.

150-Strike Call Exercised

Call converted into +100 shares with a purchase price of $150/share.

125-Strike Put Exercised

Put converted into -100 shares with a sale price of $125/share.
It is important to note that any option that is in-the-money by $0.01 or
more and is held through expiration will be automatically exercised.

Call Strike Price: $150

Stock Closing Price at Expiration: $150.01 or higher
Result: You buy 100 shares (per call) at $150/share

Put Strike Price: $90

Stock Closing Price at Expiration: $89.99 or lower
Result: You sell/short 100 shares (per put) at $90/share

Recommendation: Always close option positions before expiration.

Each option contract corresponds to +/- 100 shares of stock, so the stock position
scales with the number of contracts exercised.

Exercise 5x Calls Exercise 13x Puts

Buy 500 Shares @ Strike Sell 1,300 Shares @ Strike

In most examples I am using 1x contract, which is why I only talk about 100
shares. The P/L also scales with the number of contracts. All trade examples in
this presentation can be sized up by multiplying the P/Ls by the number of
contracts bought/shorted.
125-Strike Put Exercised
Put converted into -100 shares with a sale price of $125/share.

If a trader has NO stock position and exercises a put option on the stock, they will
effectively SHORT shares at the put's strike price.

Stock Position: Zero Shares

Exercise Put (1x Contract): -100 Shares at the Put's Strike Price
New Stock Position: -100 Shares
 When you short an option, you're taking on an obligation. If the person who
bought that option decides to exercise it, you are "assigned." This means:

Call Owner Exercises Short Call Trader Assigned

Buys 100 Shares @ Strike Sells 100 Shares @ Strike

Put Owner Exercises Short Put Trader Assigned

Sells 100 Shares @ Strike Buys 100 Shares @ Strike
Many traders worry about early assignment, or having a short option that gets assigned
because a trader on the other side exercised their option before expiration.

In many cases, the worry is unnecessary because option owners forfeit the extrinsic
value in an option when they exercise it.

Stock Price: $166

Call Strike: $160
Call Price: $10 ($6 Intrinsic + $4 Extrinsic)
Call Value: $1,000 ($600 Intrinsic + $400 Extrinsic)

If the call owner exercises the call, they will forfeit the call option ($1,000 value) and buy
100 shares at $160/share.

They can then sell the shares for $166, making $600 on the transaction, but they gave
up the $1,000 option to do so. So by exercising the option, they gave up $400 in value
for no reason.
Stock Price: $166
Call Strike: $160
Call Price: $10 ($6 Intrinsic + $4 Extrinsic)
Call Value: $1,000 ($600 Intrinsic + $400 Extrinsic)

If the call owner wants to buy shares, they are better off selling the call and
buying shares instead of exercising the call.

Therefore, a trader that is short this call option is very unlikely to be assigned.
To gauge early assignment on a short option, look at the extrinsic
value.

An ITM option with little to no extrinsic value is at high risk of

assignment since there is little to no forfeiture of value if the owner
exercises it.

An ITM option with lots of extrinsic value ($0.50+) is at low risk of

assignment since there is a lot of value forfeited unnecessarily if the
owner exercises it.
Stock Price: $408.55
350 Call Mid-Price: $69.00
350 Call Intrinsic: $58.55
350 Call Extrinsic: $10.45

If a trader exercised the 350 call

given these prices, they would
sacrifice $1,045 in value for no
reason.

A trader short this call has virtually

zero risk of assignment despite the
call being $58.55 in-the-money.
What conditions result in an option being in-the-money with little to no
extrinsic value?

1) The option is very deep ITM before expiration (the more time to expiration,
the further ITM the option needs to be to reach close to zero extrinsic value).

2) The option is ITM with little to no time left before expiration.

The main scenario to beware of early assignment is when you are short an ITM
call option on a stock that is paying a dividend before your expiration date.

If the dividend is greater than the extrinsic value in your short ITM call, you are
likely to be assigned right before the ex-dividend date.

Dividend: $0.58
Short ITM Call Extrinsic: $0.30
Incentive to Exercise: +$0.28/share

In this scenario, the call owner will exercise the option (giving up $0.30 in
extrinsic value) to purchase stock before the ex-dividend date in order to
collect the $0.58 dividend.
Section Summary

Options are rarely exercised because they often carry a lot of extrinsic value in
their prices.

Extrinsic value is sacrificed by the owner when they exercise the option.

The more extrinsic value an ITM short option has, the less likely it is to be
exercised (reducing assignment risk).

From the OIC Website:

"Historically, more than 72% of all option contracts are closed out in the
market prior to expiration. Additionally, another 22% expire without value
while the remaining 6% get exercised."
The expected magnitude of a stock's price changes in the future, as
implied by the stock's option prices:

40-Day 450 Call Implied

Stock
Price Volatility

SPY ($447) $8.00 17%

NVDA ($447) $34.50 60%

 Same stock price.
Same time to expiration.
Same strike price.
NVDA option = 4x more expensive
NVDA Implied Volatility > SPY Implied Volatility
NVDA's volatility is much higher than SPY's
volatility, resulting in more expensive NVDA
option prices (higher implied volatility).
A higher volatility stock has a much wider
range of expected stock prices over a given
time period compared to a lower volatility
stock. The option prices will reflect this.
Think of the option prices like
the width of the arrows.
Changes in expected stock volatility will have an impact on option
prices (implied volatility) and therefore trade profitability.
Let's explore how popular options strategies perform when
implied volatility changes so we know exactly what we want IV to
do when we trade each options strategy.
In the following graphs, we're going to look at simulated option
strategy profits/losses based on the following inputs:

Entry Implied Volatility: 20%

IV Changes: 10% and 30% (-10% and +10% IV Changes)
Days to Expiration: 60
Stock Prices: Varying
Buying Calls (Long Calls)

When buying calls, we want

implied volatility to increase.
Buying Puts (Long Puts)

When buying puts, we want

implied volatility to increase.
Short Iron Condor

When shorting iron condors,

we want IV to fall if the stock
price is in-between our short
strikes.

If one of our spreads becomes

fully in-the-money (stock
moves big), we want IV to
increase.
Buying Call Spreads (Bull Call Spread)

When buying call spreads, we

want IV to fall if the stock
moves higher and the spread
becomes fully ITM.

If the stock price collapses, we

want IV to increase.

Fortunately, IV typically falls

when the stock price rises, at
least for stock indices like the
S&P 500.
Buying Put Spreads (Bear Put Spread)

When buying put spreads, we

want IV to fall if the stock
moves lower and the spread
becomes fully ITM.

If the stock price rises, we

want IV to increase.

Unfortunately, IV typically rises

as the stock price falls, and
vice versa.
Buying Put Spreads (Bear Put Spread)

When buying put spreads, we

want IV to fall if the stock
moves lower and the spread
becomes fully ITM.

If the stock price rises, we

want IV to increase.

Unfortunately, IV typically rises

as the stock price falls, and
vice versa.
Buying Call Butterflies (Long Call Butterfly)

When buying butterflies, we

want IV to fall if the stock price
is around the short strike.

If the stock makes a big move

beyond either long strike, an
increase in IV will soften the
losses.
Short Strangle

When shorting strangles, we

want IV to fall regardless of the
stock price movement.
Short Straddle

When shorting straddles, we

want IV to fall regardless of the
stock price movement.
What does a decrease in implied volatility mean?

It means option prices have fallen (all else equal). Option prices
deflating means the market expects less volatility going forward.

Option Prices Option Prices

$$$$ $$

Expected Expected
Stock Vol. Stock Vol.
What does a decrease in implied volatility mean?

It means there's less uncertainty about the stock's future price

movements

=> A higher probability the stock will be around its current price
in the future.
Short Straddle

If IV falls, the options are telling us

that the stock price has a higher
probability of being closer its current
price in the future (compared to
higher IV).

If I'm short the 200 straddle and IV

collapses with the stock at $200, the
options are saying there's a higher
probability the stock price will be
around $200 in the future.

Option prices fall => short straddle

profits.
Buying Call Spreads (Bull Call Spread)

If IV falls, the options are telling us that

the stock price has a higher probability
of being closer its current price in the
future (compared to higher IV).

If I own a call spread that's fully ITM,

that means my spread has a higher
probability of expiring fully ITM and the
spread price increases (my position
gains value).

If the spread is OTM and IV falls, the

probability of expiring worthless
increases, and the spread price falls
(my position loses value).
What does an increase in implied volatility mean?

It means option prices have risen (all else equal). Option prices
inflating means the market expects more volatility going forward.
Option Prices Option Prices
$$ $$$$

Expected Expected
Stock Vol. Stock Vol.
What does an increase in implied volatility mean?

It means there's more uncertainty about the stock's future price

movements

=> A lower probability the stock will be around its current price
in the future.
Short Iron Condor

If IV increases, the options are telling us

that the stock price has a lower
probability of being closer its current
price in the future (compared to lower IV).

If I'm short an iron condor and IV surges

with the stock price in-between my short
strikes, the probability of the stock staying
there is now lower.

The Iron Condor increases in value and I

lose money as the short trader.
Let's say a trader wanted to short the GME pump by
purchasing put options.

They timed the trade perfectly, purchasing slightly

OTM puts at the top of the rally on March 22nd, 2023.
GME Stock Price vs. Put (March 22nd - May 10th, 2023)
The stock price fell towards
and through the put's strike
price of $20, yet the put
option FELL in value.

This is a perfect example of

how you can be right
directionally on an option
purchase, yet lose money
because IV drove the trade
performance.

Let's look at what IV did over

the same period.
GME Stock Price vs. Implied Volatility (March 22nd - May 10th, 2023)

The stock price fell and implied

volatility (which is measuring
option prices) collapsed.

The collapse in IV / option prices is

what caused the put purchase to
lose money even though the trade
was right directionally.
IV on "Meme" Stocks is Positively Correlated with the Stock Price

Source: AlphaQuery.com

Stock Price Implied Volatility

$18 to $27 60% to 100%+
IV on Stock Indices (Like the S&P 500) is Usually Negatively Correlated with
the Stock Price. As the S&P 500 goes down, the VIX goes up, and vice versa.

Source: AlphaQuery.com

S&P 500 ETF S&P 500 Implied Vol.

(SPY) (The VIX)
Call Prices (100 Strike) vs. Implied Volatility Changes (Simulation)

Imagine buying a call when the IV is

100% and seeing IV collapse to 50%...

You'd lose money even with a

massive stock price increase.
Call Prices (100 Strike) vs. Implied Volatility Changes (Simulation)

Imagine buying calls on a meme

stock with IV at 50% and then
seeing IV surge to 100% as the stock
moons.

This type of IV change is what we

saw when GME went UP, which is
why buying calls on meme stocks
can lead to super profits when the
stock price moons.
Entry Stock Price: $239.58
Call Strike: $240
Call Purchase Price: $14.90
Expiration: March 17, 2023 (73 DTE)

The 240 call experienced early losses as

MSFT shares fell.

The call price surged along with MSFT

shares, presenting a 100%+ gain on the
purchase price halfway through the
trade.

At expiration, the stock price was

$279.43 and the 240 call was worth its
intrinsic value of $39.43.

The long call trade ended with a profit

of +$2,453 (+164%) per contract.
Entry Stock Price: $78.11
Call Strike: $80
Call Purchase Price: $6.23
Expiration: March 17, 2023 (44 DTE)

The 80 call rallied 50% early in the trade

as ZM shares pushed higher.

However, the stock rally was short-lived

and the stock began to slide from its
high of $85 down to $65 - $70.

At expiration, the stock price was well

below the strike price of $80 and the
call expired worthless.

The long call trade ended with a loss of

-$623 (-100%) per contract.
Entry Stock Price: $76.16
Call Strike: $90
Call Sale Price: $2.86
Expiration: March 17, 2023 (56 DTE)

The 90 call experienced early losses as SQ

shares rallied up to the short strike of $90,
increasing the call's probability of expiring
ITM and its value along with it.

The call price running from around $3 to $8

represented an unrealized loss of $500 per
contract at the worst point.

The stock reversed course and remained

below the short call strike, rendering the
call worthless at expiration.

The short call trade ended with a profit of

+$286 (+100%) per contract.
Entry Stock Price: $229.71
Call Strike: $250
Call Sale Price: $17.50
Expiration: May 17, 2023 (94 DTE)

The short 250 call experienced healthy

profits in the first few days of the trade,
falling from the entry price of $17.50 to
$7.80, a near $1,000 profit per short call.

However, the stock began a vicious rally

from $200 to $320 over the coming
months, dealing heavy losses to the short
call trade.

At expiration, the stock price was $312.64,

leaving the 250 short call with its intrinsic
value of $62.64.

The long call trade ended with a loss of

-$4,514 (-258%) per contract.
Entry Stock Price: $162.34
Put Strike: $160
Put Purchase Price: $4.84
Expiration: May 15, 2020 (102 DTE)

The 160 put experienced early losses as

IWM rallied further away from the put's
strike of $160. The put reached a low of
$2.30, more than a 50% decline from the
entry price.

Then the 2020 market collapse happened,

sending IWM plummeting.

The long put became significantly ITM,

reaching a high price of $61.51 (+$5,667), but
ended with a price of $34.88 (its intrinsic
value).

The long put trade ended with a profit of

+$3,004 (+621%) per contract.
Entry Stock Price: $173.40
Put Strike: $170
Put Purchase Price: $6.09
Expiration: March 17, 2020 (73 DTE)

The 170 put in this trade lost nearly all of its

value in the first half of the trade, as IWM
shares surged away from the put's strike,
increasing its probability of expiring
worthless.

IWM turned around and began a slide from

nearly $200 back down to the put's strike of
$170, but this put ran out of time.

With the stock above $170 at expiration, the

put expired with its intrinsic value of zero.

The long put trade ended with a max loss of

-$609 (-100%) per contract.
Entry Stock Price: $97.18
Put Strike: $95
Put Sale Price: $5.05
Expiration: March 17, 2023 (51 DTE)

The 95 short put made quick profits with

AMZN's rally after trade entry. The trader
could have bought back (closed) the put for
profits at any time.

AMZN did fall hard from the initial rally,

testing the short put strike of $95 and falling
below it for a period of time, bringing the
put's price up to the entry price (resulting in
a breakeven trade at that point).

Right before expiration, the stock rallied

above the short put's strike and the trade
ended with a profit of +$505 (+100%) per
contract.
Entry Stock Price: $477.72
Put Strike: $455
Put Sale Price: $4.04
Expiration: February 18, 2023 (46 DTE)

A hypothetical trader is engaging in a

monthly short put strategy on SPY where
they short a put 5% below SPY's price.

In the first month of 2023, SPY fell about

10%, resulting in a huge appreciation in the
455 put's value as it became notably ITM.

The put ascended to a high price of $25,

over 6x higher than the inital sale price of
$4.04.

The short put expired with its intrinsic value

of $20.69, resulting in a loss of -$1,666
(-412%) per contract.
Learning option mechanics/concepts/strategies is the first step, but it's not
enough to make you a profitable trader.

In Data-Driven Options Strategies, I break down my best findings from

100s of hours of options strategy backtesting and research in exclusive video
lectures.

The course is designed to provide you with valuable data and insights to
help you make more informed, data-driven trading decisions.

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What to Expect in the Course
Exclusive, data-based options strategy research presentations by Chris.
Learn statistically-favored long-term options trading approaches.
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Additional Recommended Videos:

1) How to Understand Option Prices SIMPLY

2) The Option Greeks Explained for Beginners
3) Call Options for Beginners 2023
4) Vertical Spreads for Beginners
5) Covered Calls for Beginners 2023

I will add to and update this list going forward.

Stay tuned for emails from me with updated versions of this PDF +
new options trading resources to further your learning. :)
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