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 — One Call or One Put (no math)
Pick exactly one option (a single call or a single put). Keep it simple and use plain English. Use the Market data box above to get today’s price and open the option chains.
Example “Fed will cut rates in December” — what’s my single-option trade?
Assumption: You expect a dovish cut (easier policy than markets priced in). That tends to be bullish for broad equities (discount rates ↓; multiples ↑).
If you instead think the cut is because growth is cracking (bearish signal), see the Alternate View below.
If you instead think the cut is because growth is cracking (bearish signal), see the Alternate View below.
- Ticker: SPY or QQQ (broad market). Use the Market data box to load the symbol and get today’s last price (S₀).
- Direction: Bullish on the announcement and near-term drift → choose one long call.
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Contract (keep it generic so it always fits):
- Strike: the nearest ATM strike (closest to S₀) or up to ~2% OTM.
- DTE: ~30–60 days (covers post-meeting follow-through while limiting theta burn).
- Max loss: premium paid.
- Why this makes sense (one paragraph): A dovish surprise lowers discount rates and eases financial conditions, which supports risk assets. A straightforward long call gives convex upside with defined risk if you’re wrong.
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Guardrails (be specific):
- Exit – time: if thesis hasn’t played out in ~10 trading days, close.
- Exit – price: take profits if the option doubles; cut if value falls by ~50% or if index breaks a nearby support you identify.
- Check the chain (1–2 bullets): prefer tighter bid/ask and decent OI/volume; avoid ultra-illiquid weeklies if new.
- Visualize: Use the Strategy picker (Long Call) and the Options Profit Analyzer link below to see the payoff.
Alternate View (bearish cut): If you think the Fed is cutting because growth is deteriorating, choose one long put on SPY/QQQ (ATM to ~2% OTM, 30–60 DTE). Same guardrails. Rationale: profits/multiples may compress if the cut signals rising recession risk.
Template A Volatile market (no specific news)
- Ticker: _______ (use Market data box)
- View: Expect drop / pop over the next few weeks
- Choose one: Long Put (downside) / Long Call (upside)
- Strike: ATM or ~2% OTM (write it: _______ )
- DTE: 30–60 days (write it: _______ )
- Why (2 sentences): ____________________________________
- Guardrails: Profit-take at +100% / stop at −50% or time stop in ~10 trading days
Template B Supply shock headline (e.g., rare-earth export limits)
- Ticker: pick a likely loser (EV/battery OEM, chip) or likely winner (rare-earth miner ETF)
- Choose one: Long Put on loser / Long Call on winner
- Strike & DTE: ATM to ~2% OTM; 30–60 DTE
- Why (2 sentences): ____________________________________
- Guardrails: Profit-take at news follow-through or +100%; stop at −50% or after the headline impact fades
Tip: Use Market data → Yahoo Options/Nasdaq Chain to confirm strikes & spreads. Use the Black–Scholes quick estimator to see how IV and DTE change the price.
Interactive: Options Profit Analyzer
Compare your long call vs long put payoffs quickly.
Submit: 6–8 bullets total (ticker, direction, contract, why, two guardrails, chain check). Keep it to one option only. No screenshots needed.
Ready to check your understanding?
15 quick questions • no math • takes just a few minutes.