Advanced Strategies & InstrumentsAdvanced📖 10 min read

Options Strategy Basics

Treat options as risk tools first — leverage tools second.

Options are
Payoff-shaping contracts
Hidden cost
Time decay and implied volatility
Rookie trap
Buying cheap out-of-the-money options
Best first use
Defined-risk hedging

Options are contracts that change payoff shape. Used well, they can hedge downside or generate structured income. Used poorly, they concentrate risk through leverage and time decay. Your first job is to understand the contract, not the story.

Table of Contents

Core Definitions

Call / Put
A call benefits from price going up; a put benefits from price going down (or from hedging downside).
Premium
The price paid for an option. Think of it as the cost of insurance or the cost of a payoff shape.
Theta (Time Decay)
Option value tends to decline as time passes, all else equal. Time is not neutral when you own options.

Two Misconceptions That Hurt Beginners

Misread #1: "Cheap options are a bargain"
Misconception
Out-of-the-money options are cheap, so the risk is small.
Better Frame
Cheap often means low probability. Many cheap options expire worthless; the expected value can be negative after costs.
Misread #2: "Selling options is free income"
Misconception
Collecting premium is easy money.
Better Frame
Premium compensates sellers for taking tail risk. Know what happens in stress, and avoid undefined risk early.

A Safe-First Starting Checklist

Before you trade an option

  • Define your purpose: hedge, income, or directional view.
  • Define max loss and position size before entry.
  • Understand time decay and implied volatility changes.
  • Avoid undefined risk until you have a proven process.
Checkpoint
What is the biggest hidden risk for someone buying short-dated options repeatedly?

Key Takeaways

1

Options reshape payoff; understand the contract first.

2

Time decay and volatility are the main hidden forces.

3

Start with defined-risk uses and strict position sizing.

Related Terms

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