Session 14 • Options & Volatility (Hedging)
Calls, puts, reading the chain, picking expirations & strikes, protective puts and zero-cost collars, plus how speculators use options. Includes an interactive payoff lab. No heavy math.
0) Options 101 — fast, plain-English
- Call = right (not obligation) to buy a stock at a strike by an expiration.
- Put = right to sell at the strike by expiration.
- Buyer pays the premium (max loss = premium).
- Seller (writer) collects premium but takes on obligations (risk can be large).
- Greeks (intuition only): delta ≈ directional sensitivity; theta ≈ time decay; vega ≈ IV sensitivity; gamma ≈ how delta changes.
Why use options? Hedge (protect a stock) • Express views with limited capital • Generate income (covered calls). No heavy math needed here—just structure.
1) Option chain — how to read
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Where is this? Your broker’s “Option Chain” page. Equity options in the U.S. are generally multi-listed and clear through the OCC; you don’t pick an exchange manually—your broker routes to Cboe/NYSE Arca/Nasdaq PHLX etc. for best execution.
2) Picking expiration (DTE: days-to-expiry)
1–7~30–60180–365+
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Rules of thumb:
- Hedges: pick more time (e.g., 60–180d or LEAPS for long horizon). Less theta burn.
- Event trades: short DTE can focus exposure but theta + IV crush risk is high.
- Students: avoid ultra-short weeklies until you understand decay & IV.
2.5) Market data — price, chains & quick estimator
Last: —
Change: —
source: Stooq daily (csv)
Quick call/put estimator (Black–Scholes)
Call (theo): —
Put (theo): —
At-expiry model (no dividends). Use links for *actual* chains.
3) Strategy picker — payoff lab (at expiration)
Lines show P/L at expiration (before fees/taxes).
Interpretation: Long options have limited loss (premium) and convex upside/downside. Adding a put caps downside; selling a call caps upside to fund that protection (collar).
Videos (Beginner) + Interactive Analyzer
Options Trading For Beginners — The Basics
Options Trading for Beginners — Total Guide (with Examples)
Interactive: Options Profit Analyzer (FYI only)
Try simple payoffs and compare setups alongside today’s lesson.
4) Hedge a stock — protective put & zero-cost collar
Protective put (own shares + buy put):
- Floor set near the put strike (minus the premium paid).
- Upside remains open.
- Use for: known downside risk windows, sleep-at-night protection.
Zero-cost collar (own shares + buy put − sell call):
- Put premium funded by the call you sell → ≈ $0 net.
- Downside limited, but upside capped at call strike.
- Use for: protect while you’re willing to forgo gains above a target.
Heads-up: “Zero-cost” depends on IV/skew & chosen strikes; could be net debit/credit. Assignment risk exists if short call finishes ITM.
5) Speculation — how calls/puts are used
- Bullish: Long call (defined risk), or call debit spread (buy call, sell higher-strike call to reduce cost).
- Bearish: Long put, or put debit spread.
- Event: Short-dated options magnify theta/IV risk. IV crush after earnings is common.
Avoid (beginners): naked short calls/puts (undefined/large risk), complex multi-leg credit strategies without risk caps, over-sizing positions relative to account.
6) What to watch out for
- Liquidity: prefer tighter bid/ask, decent OI/volume.
- Time decay (theta): faster in short DTE & OTM contracts.
- IV changes: IV up helps longs (vega +); IV down hurts.
- Assignment/exercise: U.S. equity options are mostly American-style (can be exercised early). Dividends matter for early call exercise.
- Commissions/fees: multi-leg strategies = more fees.
Broker differences: some default to “net debit/credit” tickets; confirm legs, strikes, quantity, and that it’s a defined-risk strategy.
7) Futures vs. Options — which is riskier?
| Futures | Options (long) | |
|---|---|---|
| Exposure | Linear (up/down 1:1) | Convex (right, not obligation) |
| Max loss | Large/uncapped without stop; margin calls | Premium paid |
| Capital | Margin (varies; can be high) | Premium (lower $ outlay) |
| Sensitivity | No Greeks; direct delta | Greeks (delta, theta, vega, gamma) |
| Who should use | Hedgers & pros comfortable with margin | Hedgers/specs who want defined risk |
Answer: For a buyer, options are typically less risky than futures (max loss = premium). For a seller, options can be more risky than futures (e.g., naked short call ≈ unlimited risk). Strategy matters.
8) Should students trade options?
Safer ways to learn:
- Paper trade first; log your thesis & risk.
- Start with defined-risk only (long options, debit spreads).
- Size small (<1%–2% risk of account per idea).
Not recommended: naked short options, event-lottery weeklies, martingale sizing. If you don’t know how IV, theta, and assignment work—pause.
9) Homework — NVDA decision for the Fed’s December rate meeting
Task: Using the Nasdaq NVDA option chain, pick exactly one trade: Call or Put, and Long (Buy) or Short (Sell). Choose a strike and expiration, check Open Interest, Volume, and Bid/Ask. Your event driver is the Fed’s December interest-rate decision.
Where to look:
Open Nasdaq: NVDA Option Chain
Or use: Market data → “Nasdaq — Option Chain” (set symbol = NVDA)
Your deliverable (6–8 short bullets)
- Ticker: NVDA
- Trade: Buy/Sell + Call/Put (pick one only)
- Contract details: Strike = ___ ; Expiration = ___ (write the calendar date)
- Liquidity check: OI = ___ ; Volume (today) = ___ ; Bid/Ask = ___ / ___
- Thesis (2–3 sentences): Fed cut/hike/pause → bullish/bearish for NVDA because ___
- Risk guardrails: Profit-take rule and exit rule (e.g., +100% / −50% or time-stop in ~10 trading days)
- Total cost or credit (now): fill using the calculator → —
💡 Suggestions & hints (click to reveal)
- Dovish surprise (bullish risk assets): consider a long call near-ATM, ~30–60 DTE, to capture potential follow-through with defined risk.
- Hawkish surprise or growth scare: consider a long put near-ATM, ~30–60 DTE.
- Why options: convex payoff & defined loss (premium) if you buy; lets you express event risk with limited capital.
- Liquidity: prefer tighter bid/ask and decent OI/Volume; avoid ultra-illiquid contracts.
- Note on selling options: short naked options can have large/undefined risk and margin requirements—not required for beginners.
Cost helper (per 1 contract)
Total now: — (excl. fees)
Formula: |premium| × 100 × qty (debit if Buy, credit if Sell)
Copyable submission template
Submit: 6–8 bullets only (see list). No screenshots required. If you choose to sell options, note your broker’s margin requirement and the risk shape.
Ready to check your understanding?
15 quick questions • no math • takes just a few minutes.