Options Education Center

Buying a calendar spread involves buying a longer term LEAP call and selling a shorter dated call, resulting in a net debit transaction.  The crux of this strategy revolves around the idea that the theta on the shorter term option will increase rapidly as expiration approaches which causes the shorter term option to lose its time value much faster than a longer dated one

The bullish call spread can be created by buying lower strike calls and selling, or shorting, the same number of higher strike calls with the same expiration.  It will cap your profit potential but limit your downside at the same time if the stock does not go up as you expected.

The bull put spread utilizes one long and one short put to profit from a rising market.

The butterfly spread is put together to create a low risk, low reward options strategy and is designed to take advantage of a market or stock that is range bound.  The butterfly can be created using call or put options.

A call option is an agreement between a buyer and a seller that gives the right to the options holder to buy a specified number of shares at a predefined price and within a predefined period of time

A call ratio backspread is a good strategy if you have a strong conviction that the security you are buying options on will have a strong upside move.

A Call Ratio Spread is an options strategy for traders who believe that the stock go sideways to down until expiration of the option.  The strategy consists of buying 1 in the money call and selling 2 out of the money calls on the same underlying security and expiration date

A Collar options strategy employs the use of LEAP calls and puts to set up a very low risk/riskless trade.

The condor spread takes advantage of a range bound stock which will make very small movements untili expiration.  The condor spread utilized four options; all calls or all puts.

A covered call refers to a situation when one is long the stock and short the call.  Covered calls allow the seller to hedge the downside risk of their stock.

A credit default swap (CDS) is a credit derivative product which allows the holder of a fixed income security to transfer the credit risk portion associated of that security on to a counterparty for a fee

The term implied volatility refers to an expectation of volatility in the underlying asset from the present till the options expiration, using current options pricing data as a basis

The intrinsic value of an option is the difference between the strike price of the option and the current price of the underlying.  There is only intrinsic value if the option is in the money

LEAPS are long term options used by buyers and sellers who want longer term protection

The long guts option strategy is a volatility trade that is created when the trader believes that there will be a sharp move up, or down in the underlying.  This options strategy involves buying an equal amount of ITM calls and puts, which have the same expiration date.

Option greeks measure the options sensitivity to various risk components inherent to the price of an option. Delta, gamma, theta, vega, and rho measure the speed of the underlying securities price movement, interest rate movement, time decay of an option, and volatility.

Options in one of four security classes will expire every month; stock options, index options, single stock futures, and stock index futures. 

Options moneyness refers to the stocks price relative to the options strike price.  Options can be In the Money, Out of the Money, or At the Money. 

A put option is a contractual agreement between the buyer and the seller of the option that gives the right, but not the obligation, for the put holder to force the seller of the put to purchase the underlying security at the strike price on the options expiration date  

Options allow the buyer and seller to hedge their risks or speculate on future moves in the underlying security.  Learn about the basics of options at mysmp.com.

A straddle is an option strategy that involves buying 2 at the money options, one call and one put with the same strike price.

A strangle option strategy is a basic volatility strategy which comes with low risk but will require dramatic price moves to pay out profitably.

The strike price of an option is the exercise price of an option at expiration. 

Use synthetic calls to limit the risk of a stock free falling.

The underlying security is a specific security that is represented by an options of futures contract.  It references the actual stock or commodity.