Understanding Options

Curriculum

16 live sessions

Each session includes a learning objective, practical work, and a competency demonstration. Session titles below are the full syllabus.

1. 01What Options Are and Why They Exist

   What you learn. Understand what an option contract is and why options exist in financial markets. Learn the fundamental problems options can solve: expressing a market view, hedging an existing position, transferring risk, and obtaining leveraged exposure. Understand the basic relationship between the underlying asset and the option contract, and why an option has value even though it does not represent ownership of the underlying in the same way as stock.

   Practical work. Examine several real-world examples of options being used for speculation, hedging, and risk transfer. For each example, identify the underlying exposure, the risk being transferred or assumed, and the reason an option is preferable to simply buying or selling the underlying.

   Competency. Given a real-world financial objective, explain whether an option could address it, what risk the option transfers or creates, and why the option is being used instead of simply trading the underlying.

2. 02Options vs Stocks: Risk–Reward Comparison

   What you learn. Understand the fundamental differences between owning stock and owning an option. Compare capital requirements, leverage, maximum loss, upside potential, time sensitivity, and the consequences of being directionally correct but wrong about timing. Understand that option leverage can magnify both gains and losses and that an option is a wasting asset when time value is present.

   Practical work. Compare a stock purchase with a long call and a long put based on the same underlying and investment thesis. Examine how the positions behave when the underlying rises, falls, or remains unchanged over time.

   Competency. Given a stock position and a comparable option position, explain the differences in maximum risk, capital committed, payoff, timing sensitivity, and conditions required for the option position to outperform the stock.

3. 03Calls and Puts: Rights, Obligations, and Contract Specifications

   What you learn. Understand calls and puts, buyers and sellers, rights and obligations, and the basic structure of an option contract. Learn how to identify the underlying, option type, strike price, expiration date, contract multiplier, and whether the position is long or short.

   Practical work. Examine real option contracts and identify the underlying, strike, expiration, multiplier, type, and buyer/seller position. Translate an option symbol or chain entry into plain English.

   Competency. Given an unfamiliar option contract, explain who has the right, who has the obligation, what is exchanged, the relevant contract specifications, and under what conditions the contract can have value.

4. 04European vs American Options

   What you learn. Understand the difference between European-style and American-style exercise. Learn that exercise style determines when the holder can exercise and therefore affects early-exercise and assignment considerations. Understand why the distinction matters even when an option is normally closed before expiration.

   Practical work. Compare European- and American-style options on different underlyings. Examine scenarios involving early exercise, dividends, and expiration to determine whether exercise is permitted.

   Competency. Given an option and a proposed exercise scenario, correctly determine whether exercise is permitted, identify who faces assignment risk, and explain why the exercise style matters.

5. 05Payoffs and Break-Even at Expiration

   What you learn. Understand the difference between an option's expiration payoff and the profit or loss from the trade. Learn how to calculate and graph the expiration payoff of long calls and long puts, including intrinsic value, maximum loss, maximum gain where applicable, and break-even price.

   Practical work. Construct expiration payoff diagrams for long calls and long puts at multiple strikes and premiums. Calculate the break-even price and profit or loss at several underlying prices at expiration.

   Competency. Given a long call or long put, calculate and explain its expiration break-even, maximum loss, maximum gain where applicable, and profit or loss at specified underlying prices.

6. 06Premium, Intrinsic and Time Value, and Mark-to-Market

   What you learn. Understand how an option premium is composed of intrinsic value and time value. Learn the difference between an option's current market value and its expiration payoff. Understand why an option can lose money even when the underlying moves in the anticipated direction, and why the expiration payoff diagram cannot be used to determine current P&L before expiration.

   Practical work. Take live or historical option examples and decompose premiums into intrinsic and time value. Track an option through several underlying prices and dates and compare its mark-to-market P&L with its eventual expiration payoff.

   Competency. Given an option position before expiration, explain its current intrinsic value, time value, market value, and P&L, and explain why the position's current P&L may differ from the expiration payoff.

7. 07Moneyness: ITM, ATM, OTM

   What you learn. Understand in-the-money, at-the-money, and out-of-the-money classifications for calls and puts. Learn how moneyness relates to intrinsic value, option premium, strike selection, and directional exposure. Develop an intuitive understanding of why different strikes respond differently to changes in the underlying.

   Practical work. Classify calls and puts across a range of strikes and underlying prices as ITM, ATM, or OTM. Compare premiums and intrinsic values across the strikes.

   Competency. Given an underlying price and a set of call and put strikes, correctly classify each contract as ITM, ATM, or OTM and explain which contracts contain intrinsic value and why.

8. 08Reading the Option Chain: Quotes, IV, and Execution Quality

   What you learn. Learn how to read an option chain and interpret bid, ask, last price, spread, volume, open interest, and implied volatility. Understand why the displayed last price is not necessarily an executable price and why high volume or open interest does not automatically mean an option is liquid. Learn the basic distinction between market and limit orders and the importance of execution quality.

   Practical work. Examine real option chains and compare strikes based on bid/ask spread, displayed liquidity, volume, open interest, and IV. Identify contracts where the quoted market appears more or less practical to trade.

   Competency. Given an unfamiliar option chain, identify the relevant quote information, assess basic execution quality, distinguish liquidity from volume/open interest, and explain whether a market or limit order would be appropriate for the stated situation.

9. 09Strike Selection Strategies

   What you learn. Understand how strike selection changes the characteristics of a long option position. Examine the trade-offs among probability, premium paid, leverage, delta, intrinsic value, and time value. Learn that there is no universally correct strike; the appropriate strike depends on the trade thesis and its required payoff characteristics.

   Practical work. Given the same market thesis, compare several call or put strikes and evaluate their premium, moneyness, delta, break-even, maximum loss, and potential payoff.

   Competency. Given a defined market thesis and several available strikes, select a contract and defend the selection using cost, moneyness, exposure, break-even, and risk considerations.

10. 10Expiration Selection Fundamentals

    What you learn. Understand how expiration selection affects time available for the thesis, premium, time value, theta exposure, and the probability of the option remaining valuable. Learn the trade-off between buying more time and paying more premium, and why choosing an expiration is fundamentally a decision about how much time the thesis needs.

    Practical work. Compare otherwise similar options with different expirations. Examine changes in premium, break-even, time value, and sensitivity to the passage of time.

    Competency. Given a market thesis with an expected time horizon, select an appropriate expiration and explain the trade-offs between shorter and longer-dated alternatives.

11. 11Exercise vs Assignment Mechanics

    What you learn. Understand exercise, assignment, expiration, and the basic mechanics of what happens when an option holder exercises. Learn the difference between the option holder's decision to exercise and the option seller's obligation to fulfill an assignment. Understand the basic relationship between long and short option positions through exercise and assignment.

    Practical work. Walk through call and put exercise/assignment scenarios from both the holder's and writer's perspective. Trace what happens to each party when an option is exercised.

    Competency. Given a call or put exercise scenario, correctly identify who exercises, who can be assigned, what obligation is created, and what happens to the underlying position after exercise/assignment.

12. 12Cash Settlement vs Physical Delivery

    What you learn. Understand the difference between physical settlement and cash settlement. Learn why settlement type matters for the final outcome of an option position and why the same option mechanics can produce very different post-expiration obligations depending on the underlying and contract specifications.

    Practical work. Compare equity options, index options, and other examples with different settlement conventions. Trace the final cash flow or delivery obligation for an in-the-money option at expiration.

    Competency. Given an option contract and an in-the-money expiration scenario, identify the settlement method and correctly explain what the holder and/or writer receives, pays, or delivers.

13. 13Early Assignment Scenarios: American Calls and Dividends

    What you learn. Understand why early assignment can occur with American-style options and why dividends can increase early-assignment risk for short calls. Learn the relationship among intrinsic value, remaining time value, and an upcoming ex-dividend date. Understand practical ways a trader can identify and manage assignment exposure.

    Practical work. Analyze short-call positions around ex-dividend dates. Compare the remaining time value with the dividend and determine when early exercise may become economically relevant.

    Competency. Given a short American call, underlying dividend information, and the option's remaining time value, identify whether early assignment risk requires attention and explain the factors driving that risk.

14. 14Exercise and Assignment Integration Lab

    What you learn. Integrate exercise, assignment, expiration, settlement, dividends, and contract style into complete option scenarios. Learn to reason through the chain of events rather than treating exercise and assignment as isolated definitions.

    Practical work. Work through realistic scenarios involving expiration week, an in-the-money short option, an upcoming dividend, early exercise, assignment, and different settlement methods. Determine the resulting position and cash flows.

    Competency. Given an unfamiliar exercise or assignment scenario, correctly trace the sequence from option position through exercise/assignment to the resulting underlying and cash position, identifying the material risks at each step.

15. 15Greeks as a Risk Map: Introduction

    What you learn. Develop an introductory understanding of delta, theta, and vega as measures of option sensitivity. Learn that Greeks describe how a modelled option value responds to changes in specific inputs; they are sensitivities, not predictions. Understand that multiple sensitivities can affect an option simultaneously.

    Practical work. Examine a long call and long put and observe how their displayed delta, theta, and vega change across strikes and expirations. Use simple scenarios to identify which risk factor is changing.

    Competency. Given an option position and its displayed Greeks, explain what delta, theta, and vega represent, identify which risk each measures, and explain why the Greeks should not be interpreted as predictions of future price movement.

16. 16Long Calls and Long Puts — Integration and Course Exam

    What you learn. Integrate the core concepts from Course 1 into a complete long-option trade. Learn to connect market thesis, contract selection, moneyness, expiration, premium, break-even, maximum loss, liquidity, and basic Greek exposure into one coherent trade plan.

    Practical work. Construct a long call or long put trade from a stated market thesis. Select the underlying, strike, expiration, and execution approach; calculate the premium exposure, break-even, maximum loss, and expiration outcomes; then define an exit or invalidation plan.

    Competency. Given an unfamiliar market scenario and option chain, build and defend one complete long-option trade. Explain the thesis, contract selection, maximum loss, break-even, liquidity, basic Greek exposure, exit conditions, and the circumstances under which the original thesis would be considered invalid.