PureTrading

Options trading, explained in plain English

Learn what an option is, what sets its price and why time matters. Then pick up the free guides, strategy walkthroughs and email course that go further.

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This takes you to OptionTradingTips.com.

How an option's price falls as expiry approaches A line chart of the price of an at-the-money call option over the last 90 days before expiry. The price falls slowly at first and then faster as expiry gets close. $0 $5 $10 90 60 30 0 Days left until expiry
90 days left
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30 days left
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7 days left
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Price of a call option with the strike equal to the share price, on a $100 share, with a 4% interest rate. It falls faster as expiry gets close. Raise the volatility and the whole curve lifts. A theoretical Black-Scholes value, not a market quote.

What an option is, in four sentences

An option is a contract that gives you the right, but not the obligation, to buy or sell a share at a set price by a set date. A call is the right to buy, and a put is the right to sell. The set price is the strike, and the date is the expiry. If you buy an option, the most you can lose is what you paid for it, called the premium.

Selling an option is different. The seller collects the premium but takes on an obligation, and the risk can be much larger than the premium. That is why learning how options behave comes before trading them.

What sets an option's price

The chart above shows two of these at work: time and volatility.

  • The share price compared with the strike The closer the share price is to the strike, or the further past it, the more the option is worth.
  • Time left until expiry More time means more chance for the share to move, so more time is worth more. Each day that passes takes some of that value away.
  • Volatility The more a share tends to swing, the more its options cost, because bigger moves are more likely.
  • Interest rates and dividends These have a smaller effect, but pricing models include them.

Where to go next

Everything below starts on the OptionTradingTips.com home page.

  • The Options 101 guide What options are and how they are priced, with payoff diagrams and a look at delta.
  • Strategy guides Iron condors, spreads and butterflies, with payoff diagrams and worked examples.
  • A free Excel workbook Prices options, shows the Greeks and draws payoffs, so you can test ideas yourself.
  • A free 7-day email course One short lesson a day: what an option is, calls and puts, reading an option chain, the Greeks, volatility, a first strategy and a trading plan.

Start with the basics

The guides, the workbook and the email course are free. There is also a paid video course for anyone who wants to go deeper.

Explore the free guides