The inspiration for this came from a screenshot of an old Series 7 exam prep.
This is a beginner-friendly guide to understanding options in the financial market. This guide covers the basic terminologies used in options trading and discusses the concepts of option moneyness, option positions (long and short) for both calls and puts, and some important terms used in trading.
Option moneyness describes the relationship between the stock price and the strike price of the option.
- In The Money (ITM): The condition where the stock price is greater than the strike price (Stock Price > Strike Price)
- Out of The Money (OTM): The condition where the stock price is less than the strike price (Stock Price < Strike Price)
- In The Money (ITM): The condition where the strike price is greater than the stock price (Strike Price > Stock Price)
- Out of The Money (OTM): The condition where the strike price is less than the stock price (Strike Price < Stock Price)
| LONG | SHORT | |
|---|---|---|
| CALLS | Right To Buy (Cash) | Obligation To Sell (Stock) |
| lower strike = higher prem | Trend: Bullish | Trend: Bearish |
| Max Gain = Unlimited | Max Gain = Premium | |
| Max Loss = Premium | Max Loss = Unlimited | |
| B/E = Strike + Premium | B/E = Strike + Premium | |
| PUTS | Right To Sell (Stock) | Obligation To Buy (Cash) |
| higher strike = higher prem | Trend: Bearish | Trend: Bullish |
| Max Gain = Strike - Premium* | Max Gain = Premium | |
| Max Loss = Premium | Max Loss = Strike - Premium* | |
| B/E = Strike - Premium | B/E = Strike - Premium | |
| * Assuming stock price is at $0 |
- Net Debit: A scenario where you end up paying money to either open or close a position.
- Net Credit: A scenario where you receive money to open or close a position.
If you would like to contribute, make corrections, or enhancements to the content, feel free to make a pull request.
This project is licensed under the MIT License - see the LICENSE file for details.
This guide is meant for educational purposes only. Options involve risk and are not suitable for all investors. Please consult a financial advisor before making any investment decisions.