Options Learning Path

Options give you choices that stocks do not: you can profit from a move, from a lack of movement, from a change in volatility or from time passing, and you can define your maximum loss before you enter. They also have more moving parts than any other common instrument. This path builds them up in the right order so each new idea sits on a solid base.

Before you start#

You should be comfortable with the material in the first five stages of the Beginner Learning Path, especially Order Types Explained, the Bid-Ask Spread and Position Sizing. Options spreads are wider than stock spreads and position sizing works differently, so those basics matter here.

Stage 1: What an option is#

1. What Is an Option?
2. What Is a Derivative?
3. How Options Work
4. Calls and Puts
5. Strike Price
6. Option Premium
7. Option Expiration Dates
8. American vs European Options

Practice: open an option chain for a large stock and find, for one expiration date, the call and put closest to the current price. Write down their prices and the bid ask spreads.

Stage 2: How options are priced#

1. Intrinsic and Extrinsic Value
2. Moneyness: ITM, ATM and OTM
3. Option Payoff Diagrams
4. Exercise and Assignment
5. Early Exercise
6. Put-Call Parity

Practice: for three strikes, split each option's price into intrinsic and extrinsic value by hand.

Stage 3: Basic positions#

1. Long Call
2. Long Put
3. Covered Call
4. Cash-Secured Put
5. Protective Put
6. Collars
7. Short Call
8. Short Put
9. Synthetic Positions

Practice: draw the payoff at expiration of each position on paper before looking at the lesson's diagram.

Stage 4: The Greeks#

The Greeks measure how an option's price responds to changes in the stock price, time and volatility. They turn options from guesswork into risk you can measure.

1. The Option Greeks Explained
2. Delta
3. Gamma
4. Theta
5. Vega
6. Rho
7. Managing Portfolio Greeks

Practice: record an option's delta and price, then check how much the price moved after the stock moved $1.

Stage 5: Volatility#

1. Implied Volatility (IV)
2. Historical and Realized Volatility
3. IV Rank and IV Percentile
4. Volatility Smile and Skew
5. Volatility Crush and Expansion
6. The VIX

Practice: note a stock's implied volatility before and after its earnings report and see how much option prices changed even when the stock barely moved.

Stage 6: Spreads and strategies#

1. Vertical Spreads
2. Bull Call Spread
3. Bear Put Spread
4. Bull Put Spread
5. Bear Call Spread
6. Calendar Spreads
7. Diagonal Spreads
8. Straddle
9. Strangle
10. Iron Condor
11. Iron Butterfly
12. Butterfly Spread

Practice: paper trade one defined risk spread for each market view: bullish, bearish and neutral.

Stage 7: Going deeper#

1. Black-Scholes Model
2. Binomial and Trinomial Trees
3. Delta Hedging
4. Gamma Scalping
5. Dealer Gamma Exposure
6. Volatility Trading

Common mistakes on this path#

• Buying cheap far out of the money options. They are cheap because they usually expire worthless.
• Ignoring time decay. A long option loses value every day the stock does not move enough. See Theta.
• Selling options without understanding the tail risk. Short options earn small, frequent gains and occasionally large losses.
• Using market orders on options. Spreads are often wide; use limit orders at or near the midpoint.
• Holding through earnings without knowing implied volatility. Option prices often drop sharply after the event.

Frequently asked questions#

Are options good for beginners?#

Options can suit beginners who first learn the basics and stick to defined risk positions such as buying calls or puts with small size, or covered calls on shares they own. Selling uncovered options is not a beginner strategy.

How long does it take to learn options?#

The basics in stages 1 to 3 take a few weeks. Understanding the Greeks and volatility well enough to trade spreads confidently usually takes several months of study and paper trading.

What is the safest options strategy?#

No strategy is safe, but defined risk strategies, where the maximum loss is known in advance, such as debit spreads or covered calls, limit how much a single trade can cost.