Beginner level thread on stock options. There are so many levels to options that whole books and research papers are written over them. This thread is meant to provide a basic overview of options and how they are utilized. Shooting for 12-15 tweets, but we’ll see

First of all, you’re a beginner! You won’t be writing(selling to open) any options! That’s much riskier than buying(where you can only lose the premium you use to purchase). So for now, we’re going to focus on buying options.

And we’re also going to stick with single leg positions rather than spreads(more than one option position on the same underlying). An option is a contract between two parties to buy/sell an underlying asset at a particular price on a particular day.

For stock options, 1 contract controls 100 shares of the underlying stock. An option is a contract between two parties to buy/sell an underlying asset at a particular price on a particular day. For stock options, 1 contract controls 100 shares of the underlying stock.

There are two types of options, calls and puts. As a buyer(which is what you will be), a call gives you the right to buy. A put gives you the right to sell.

Contracts have an expiration date and a strike price. The strike price is the price at which the stock would be bought or sold at. As a beginner, you should be closing out your positions before the close of business on the expiration date. This thread is for speculators.

As a speculator you are guessing on the direction AND TIMING of the direction of the stock price. The reason for this is that there is an expiration date on your contract. But let’s talk about the general idea behind pricing of options (this thread may get long).

If a call option has a strike of $50 and the stock is at $55 on the expiration date, that contract would be worth $500 ($5 x 100 shares represented by the contract).

This is because you can buy the 100 shares from the seller of the contract for $50/share or $5,000 and sell them on the market for $5,500 ($55/share).

If a put has a strike of $50 w/ the stock at $45 on the exp. date, the contract would be worth $500 ($5 x 100 shares represented by the contract). Cause you can buy 100 shares on the open market at $45 ($4.5k) and sell them to the seller of the put option for $5k($50/share).

Here’s why timing matters. If you buy the call that expires on the 3rd Friday in May with a strike price of $50 but the price of the stock is $45 on that day, your contract would be worth $0.

This is because if you exercised the contract you would be buying a stock at $50 that you could only sell for $45. Even if the price of the stock shot up to $55 on the following Monday, you get nothing. TIMING MATTERS

Part of the value of the contract is how much time it has left to move in your favor. This is time value. As the contract gets closer to exp., time value gets smaller. This is called time decay, measured in the Greek theta.

Options that have a longer time till exp. will cost more, all else equal. The other part of the value is obv. where the price is of the stock in relation to the strike price. If you have a call option, you want the price of the stock to go up.

If you bought a put, you want the price of the stock to go down. Again this is a thread for beginners. I will link a few other threads that discuss some other options strategies.

I'll also add some more beginner info to this thread and other resources you can use to learn