Track 2 of 25

Options mechanics

Rights, obligations, strikes, expiries and assignment. The plumbing of a contract, before any pricing model appears.

20 lessons

Mark a lesson complete and it is remembered here.

What an option contract is: rights and obligationsAn option is an agreement where one side holds a right and the other side holds an obligation.6 min
Calls and puts are two different instrumentsA call is a right to acquire at a price; a put is a right to dispose at a price. They are not mirrors of each other in practice.6 min
Strike and expiry: the two coordinatesEvery option is located by a price and a date, and both are chosen from a fixed grid.6 min
Intrinsic value versus extrinsic valuePart of a premium is what the contract is worth right now; the rest is what it might become.6 min
Moneyness: in, at, and out of the moneyMoneyness is where the strike sits relative to the price, and it changes how the contract behaves.5 min
How to read a payoff diagramA payoff diagram plots outcome at expiry against underlying price, and every feature of it means something specific.6 min
The four basic positions and what each one owesLong call, long put, short call, short put — four shapes, and only two of them have a floor.8 min
Exercise and assignment are not the same thingExercise is what a holder does; assignment is what happens to a writer as a result.6 min
American versus European styleStyle determines when the right can be used, which determines whether early assignment exists at all.6 min
What open interest and volume tell youVolume counts today's trades; open interest counts contracts still outstanding. They answer different questions.6 min
The bid-ask spread is a real costYou transact at the bid or the ask, never at the middle, and the gap is paid on both ends.6 min
Why liquidity matters more than most retail investors thinkLiquidity determines whether you can act on a decision, and it disappears when decisions become urgent.6 min
Margin requirements on short optionsWriting an option ties up capital sized to the obligation, and the amount changes as the market moves.7 min
What "covered" means, and what it does not protect againstCovered means the delivery obligation is pre-satisfied; it says nothing about the value of what you hold.7 min
Spreads as a structure, not a strategyCombining options changes the shape of the payoff; the shape is a fact, the choice is not this curriculum's business.7 min
What "defined risk" actually meansDefined risk means the maximum loss is computable, not that it is small.6 min
Right about direction, wrong about moneyAn option can lose value while the underlying moves exactly the way its holder wanted.7 min
Early assignment around dividendsA dividend can make early exercise rational, which is when writers of American-style calls get assigned unexpectedly.7 min
Settlement: cash versus physicalSome options deliver shares and some deliver cash, and the difference changes what you own afterwards.6 min
Hedging a pledged portfolio versus speculatingThe same contract can reduce or increase total risk; what decides is what else you already hold.8 min

Educational only. Nothing in this track is investment, legal or tax advice, or a recommendation to enter into any transaction. Completion is stored in this browser and nowhere else.