Options are contracts that give you the right, but not the obligation, to buy or sell a stock at a specific price before a specific date. They are powerful tools — but can be devastating if misused.
The Two Types
Call Options (Bullish)
A call gives you the right to buy 100 shares at the strike price. You buy calls when you believe the stock will go UP.
Put Options (Bearish)
A put gives you the right to sell 100 shares at the strike price. You buy puts when you believe the stock will go DOWN (or to protect existing holdings).
Key Terms
| Term | Definition | Example |
|---|---|---|
| Strike Price | The price you can buy/sell at | $150 call on AAPL |
| Premium | The cost of the option | $3.50 per share ($350 per contract) |
| Expiration | When the option expires | Jan 17, 2027 |
| In The Money (ITM) | Option has intrinsic value | Stock at $160, strike at $150 |
| Out of The Money (OTM) | Option has no intrinsic value | Stock at $140, strike at $150 |
Options P/L Examples
Buying a Call (Bull Bet)
- Buy AAPL $150 Call for $5 premium (cost: $500 for 1 contract)
- If AAPL goes to $170: Profit = ($170 - $150 - $5) × 100 = $1,500
- If AAPL stays below $150: Loss = $500 (maximum loss = premium paid)
Buying a Put (Bear Bet / Insurance)
- Buy AAPL $150 Put for $4 premium (cost: $400)
- If AAPL drops to $120: Profit = ($150 - $120 - $4) × 100 = $2,600
- If AAPL stays above $150: Loss = $400 (maximum loss = premium paid)
Why Most Beginners Lose Money on Options
- Time decay (Theta): Options lose value every day as expiration approaches
- Overpaying for premiums: High implied volatility inflates option prices
- Wrong timeframe: Buying short-dated options is like buying lottery tickets
- No exit plan: Holding losing options to expiration instead of cutting losses early
Options Checklist for Beginners
- Do I understand that I can lose 100% of my premium?
- Am I using options with at least 60-90 days to expiration?
- Is my total options allocation less than 5% of my portfolio?
- Do I have a clear profit target and stop-loss?
- Have I paper-traded (simulated) options before using real money?
How This Relates to Aristockrat
While Aristockrat focuses on fundamental stock analysis rather than derivatives, understanding options helps you see the full picture. Stocks with high put/call ratios can indicate market sentiment shifts that our algorithm also detects through other signals.