Options Trading Cheat Sheet

The core ideas of Options Trading distilled into a single, scannable reference — perfect for review or quick lookup.

PiqCue — piqcue.com/options-trading/cheatsheet

Quick Reference

Call Option

A contract that gives the holder the right, but not the obligation, to buy an underlying asset at a specified strike price before or on the expiration date. The buyer pays a premium for this right and profits when the underlying asset rises above the strike price plus the premium paid.

Put Option

A contract that gives the holder the right, but not the obligation, to sell an underlying asset at a specified strike price before or on the expiration date. Put buyers profit when the underlying asset falls below the strike price minus the premium paid.

Implied Volatility

A forward-looking metric derived from option prices that represents the market's expectation of how much the underlying asset's price will fluctuate over the life of the option. Higher implied volatility means higher option premiums because greater expected price swings increase the probability of the option finishing in the money.

The Greeks (Delta, Gamma, Theta, Vega, Rho)

A set of risk measures that describe how an option's price changes in response to various factors. Delta measures sensitivity to the underlying price, Gamma measures the rate of change of Delta, Theta measures time decay, Vega measures sensitivity to volatility changes, and Rho measures sensitivity to interest rate changes.

Strike Price

The predetermined price at which the holder of an option can buy (for calls) or sell (for puts) the underlying asset. The relationship between the strike price and the current market price determines whether an option is in the money, at the money, or out of the money.

Option Premium

The price paid by the buyer to the seller (writer) of an option contract. The premium consists of intrinsic value (the amount the option is in the money) and extrinsic value (time value and volatility premium). The premium represents the maximum loss for the buyer and the maximum gain for the seller.

Covered Call

A strategy where an investor who owns the underlying stock sells (writes) call options against that position to generate income from the premium received. The strategy caps upside potential at the strike price but provides a cushion against small declines in the stock price.

Iron Condor

A four-leg, market-neutral options strategy that profits from low volatility and time decay. It involves simultaneously selling an out-of-the-money call spread and an out-of-the-money put spread on the same underlying asset with the same expiration. Maximum profit occurs when the underlying price stays between the two short strikes.

Time Decay (Theta)

The rate at which an option's extrinsic value erodes as time passes, all else being equal. Time decay accelerates as expiration approaches, particularly for at-the-money options. Option sellers benefit from time decay, while option buyers are hurt by it.

Put-Call Parity

A fundamental principle in options pricing that defines the relationship between the price of European call and put options with the same strike price and expiration. The formula states that Call Price minus Put Price equals Stock Price minus the Present Value of the Strike Price. Violations of put-call parity create arbitrage opportunities.

Key Terms at a Glance

American Option:An option that can be exercised at any time before or on its expiration date, providing greater flexibility than European options.

Ask Price:The lowest price at which a seller is willing to sell an option contract. The difference between the ask and bid is the bid-ask spread.

Assignment:The process by which an option writer is required to fulfill the obligation of the contract when the buyer exercises the option.

At the Money (ATM):An option whose strike price is equal to or very close to the current market price of the underlying asset.

Bear Put Spread:A vertical spread strategy involving buying a higher-strike put and selling a lower-strike put, used when expecting a moderate decline in the underlying.

Bid-Ask Spread:The difference between the highest price a buyer will pay (bid) and the lowest price a seller will accept (ask) for an option.

Black-Scholes Model:A mathematical pricing model for European options that calculates theoretical option values based on stock price, strike price, time, volatility, and risk-free interest rate.

Bull Call Spread:A vertical spread strategy involving buying a lower-strike call and selling a higher-strike call, used when expecting a moderate rise in the underlying.

Butterfly Spread:A three-strike strategy combining a bull spread and a bear spread that profits when the underlying stays near the middle strike at expiration.

Calendar Spread:A strategy involving options at the same strike price but different expiration dates, profiting from time decay differences between the near-term and far-term options.

Collar:A protective strategy combining a covered call and a protective put on the same underlying, creating a bounded profit-and-loss range.

Delta:A Greek measuring the rate of change of an option's price relative to a one-dollar change in the underlying asset's price.

European Option:An option that can only be exercised on its expiration date, not before. Most index options are European-style.

Exercise:The act of an option holder invoking the right to buy (call) or sell (put) the underlying asset at the strike price.

Expiration Date:The date on which an option contract becomes void and the right to exercise ceases to exist. After expiration, the option has no value.

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