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Intro to Calls
1) What do calls give you the right to do?
Calls give you the right (but not the obligation) to buy 100 shares of the underlying stock at that call's strike price. This process is called "exercising" your call option.
2) What is a strike price?
A strike price is the price that you can buy 100 shares when exercising your call option. Options are separated by strike and expiration date.
3) What is Premium?
Premium can be thought of as the option's price tag. It is written as the price per share of the 100 shares the contract controls. So, to figure out how much you'd actually pay to buy an option, you must multiply the premium by 100.
4) What is ITM, ATM, and OTM?
ITM describes calls whose strike price is below the current share price. ATM: strike=share price, OTM: strike is greater than share price. I say ITM is "good" because you can potentially exercise them for a profit. This idea is what drives the value behind call options, although it doesn't necessarily dictate them as "good". In later sections this will be discussed further.
5) What is an underlying?
The underlying is the stock on which options are traded. If you have calls on AMD, AMD is the underlying and changes to AMD's share price will affect the value of your option.
Premium
1)What is EV and IV?
EV is value given to an option's premium based on time to expiration and implied volatility. These two things work together. IV is the value of the option based on the money you would receive if you exercised it. This is why you rarely exercise; the value you get through exercising is already built into the option's premium.
2) Why do OTM options not have IV?
OTM can not be exercised for any gain, so there is no IV built into their premiums. OTM premium is composed entirely of EV.
3) With more TTM do calls have more or less premium?
More time means more time to get ITM (or deeper ITM). This is good for calls, and is reflected through higher premium.
4) How is Imp. Vol. correlated with premium?
They are positively correlated.
Implied Volatility
1) Why is volatility good for options?
Your risk is limited to the amount you paid when trading options. However, your upside is uncapped. This means with high volatility, you have a higher potential to make money with the same amount of risk.
2) How is premium correlated with Imp. Vol.?
It is positively correlated. Higher Imp. Vol. means higher premium.
3) Why is it called Implied Volatility?
It is called this because the expected volatility of the stock is extracted from the options' premiums. It is the hype behind the option that is represented as a more expensive option. In other words, the future anticipated volatility of the stock is implied by the option's premium.
Option Stats
1) What is the bid and the ask?
The bid is the highest price buyers are willing to buy at, the ask is the lowest price sellers are willing to sell at. To get in and out immediately, you must buy at the ask and sell at the bid.
2) What is the bid-ask spread?
It is the difference between the bid and the ask and is what you give up to get in and out of a trade immediately.
3) What does RH show as the option's price?
RH show's the middle of the bid-ask as the option's price. Even though Robinhood displays a price, people may not be buying or selling anywhere near that price. You ALWAYS want to make sure to check the bid-ask for this reason.
4) What is volume and OI?
Volume is the number of contracts traded that day. The higher the volume, the tighter the bid-ask. Volume is highest ATM and in options that expire in the front (next) month. OI is the number of contracts in existence, which will fluctuate.
5) What are the Greeks?
They are metrics that gauge the impact of what affects option's premiums (like stock price and implied volatility). I'm running out of characters so I'm not gonna type them all lol
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