Options explained SIMPLY
So, what's an option?
"An option is a financial contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset—typically a stock—at a predetermined price (called the strike price), and a-"
Yeah, this didn't make sense to me either when I read the definition, and what makes it harder is that I've seen the same explanation for options everywhere. Now that I understand how they work, I'm going to give you a simpler explanation:
"An option is a contract whose value depends on the price movement of an underlying stock. Depending on the type of option—call or put—it can generate gains or losses as the stock price changes."
Basically, an option works sort of like leverage on a stock price. If the stock goes up 10%, your option can go up 50%, if the stock falls 10%, your option can go down 50%. Let me show you an example:
Call option example
Let's say I think the NASDAQ is going to rise about 8.5% by the end of the year, I'm very confident in my prediction and decide to put ~$10,500 in the ETF that tracks the NASDAQ ($QQQ) and ~$10500 in options. The current price of $QQQ as of writing this is around $577. So, I purchase an OTM (out of the money) call option on $QQQ with a $610 strike price, expiring December 31, 2025 (all the things I said will make sense soon!). By November 7th, 2025, the NASDAQ has shot up 8.5% in the past few months! I see my stocks have an 8.5% gain totaling ~$900. However, on my options side I see I have a 104% gain with $10,976 in profit, on the exact same stock. An almost 95% difference in gains because of an option, which is insane!
Keep in mind profits like these are rare and are for example (see top left, chance of profit: 19.8%) but this example goes to show you how options can be a powerful tool if used right. Now that you've seen the potential gains from a call option, let's go into how they work.
Call options explained simply
To buy a call option means you first need to understand the stock. You need to do research and if you think the stock will go up, you can consider buying a call option. If you decide to buy a call option on a stock, you’re going to need to know a few things: the strike price you want, the expiration date, and whether your option is in/out of the money. The strike price is what you think the stock price will be by the expiration date (or sooner). The expiration date is when you think the stock will reach the strike price. And if the option’s strike price is below the stock price, the option is in the money, otherwise it's out of the money. Out of the money options are riskier, but their profits are also greater, and vice versa with in the money options. Out of the money options also mean the options have to move higher for you to make a profit. For puts, the role is reversed. Out of the money options are below the strike price while in the money put options are above the strike price.
Put option example
Now, let's go down to the put options example! Put options are very similar, you just need to change the strike price! Since I am predicting the NASDAQ to go down, my regular investments will actually lose money! Let's say I think the NASDAQ is going to drop to 8.5% this year instead. So, I instead buy a ~$10,500 worth of QQQ OTM (out of the money) put options with a strike price of $527, expiring December 31, 2025. My regular investments would have lost $-893 down to ~$9607. However, for the option by around October 1st, I would have made a profit of $11,030, or 110% in profit! This is a reverse of call options, so if you buy a put below the share price, it is now riskier than buying a put option above the share price.
Put options explained simply
Since with put options, you think the stock is going down, it means you profit when the stock drops—so higher strike prices are more valuable unlike calls where lower strikes are more desirable. Put options are generally less popular than call options, usually because of bullish bias. However, puts generally become more popular during recessions because they tend to make money easier. Now that you understand calls and puts conceptually, let’s actually place one on a real stock, not just an index. The stock I'm going to choose for the next part is Ollies bargain outlet ($OLLI). I'll also teach you how exactly you go around setting one up and how to choose the option you want!
A step-by-step walkthrough
Let’s walk through this trade together! I’ll be using Robinhood to purchase an options contract based on my thesis that Ollie’s Bargain Outlet ($OLLI) will reach $150 by the beginning of next year. Here’s how I’d navigate the platform on a computer step-by-step to execute the trade:
I first click the stock and hit the "trade options" button
This brings me to a page that looks like this:
From here, I want to click on the dropdown menu circled in red, and change the expiration date to my desired expiration (that being the closest to the beginning of next year, which for this stock's options is 1/16/2026) Since I think the stock will go to $150 by 1/16/2026, I can pick the strike price of $150
And then you can review the order and purchase the option! But notice something—on the bar graph below, if the stock hits $150 by the end of the expiration, you're still losing money! Why is this? The reason is extremely complicated, but basically $150 (the strike price in this example) is the bare MINIMUM the stock has to go to in order to make sure you don't lose your total investment. This is why buying options are riskier. You can lose 100% of what you put in if you buy a call/put and the share price doesn't reach the strike price by expiration!
From today, the stock would have to reach $158.2 just for you to break even by 1/16/2026! After that you will start making money. However, I showed this Robinhood method to walk you through how to purchase an option on Robinhood, if you want a better picture of how you could make/lose money over the option period, you should go to this website Options profit calculator (Hit long call and enter in the same data shown in the walkthrough).
After putting in all the data, you should get something like this:
The right side % shows the share price increase from the current price for Ollies and above shows the dates. If you wanted to know how much the option would be if Ollies hit $150 on October 1, navigate through the axis, (it's also circled in red if you're confused). This basically means if the stock price goes up 12% by October 1, you get a 60% gain! Your total investment would be around $860 to purchase the contract.
Since put options are very similar, you would do the exact same thing but instead you would select buy put on Robinhood and your strike price would be $110, as shown in the image below. The strike price of $110 on a put signifies that you think the stock is going to go down to $110 by 1/16/2026.
Here is the profit through the months, it's the same thing but just reversed! Here is also a link to interact with it and you don't feel like entering in all the data http://opcalc.com/7Bj
A few more important things
After all of this, options seem pretty easy right? The sad reality is that there are still some more barriers standing between you and profit which can make all the difference in options trading. The top 3 things standing in your way are theta decay, implied volatility (IV) and liquidity. Of course, there are more, but these are the top 3 that can make or break a position, and good for beginners to know. Let's go through the list:
Theta decay
This is a major thing to look out for, especially for expiry dates that are near (1-3 months) and the option is out of the money to begin with. Below is a simulation of an options theta decay on a 1-week vs 1 month vs 10 months option. For the simulation I assumed that the option was priced at $5 and implied volatility did not change, but this is a good general example of how theta affects options.
This means that if the share price hovered around the same price, and you had $100 you would lose $6 a day... just because the stock isn't going up/down depending on whether you have a call option or a put. As you can see, having options after 1-3 months start making theta decay less of a problem, since your option (if out of the money) has more "time" to reach the strike price. When you buy a call option that expires in a year, the market isn’t overly concerned if your strike price is 10% above the current stock price—because over that much time, anything can happen. There's room for earnings surprises, macro shifts, and momentum swings. Or just plain old posts on r/wallstreetbets shooting the stock to the moon.
But with just one week to expiry, the calculus changes. The market becomes brutally pragmatic. That same 10% gap now feels like a cliff—because the probability of reaching the strike in such a short window is slim. Theta accelerates, and the option’s value reflects that urgency.
In a way, long-dated options price in possibility, short-dated options price in probability.
Theta decay is also at its highest with options that are at the money (ATM) (that is, the strike price for the option and the share price are almost the exact same) the reason for this is because the option is now at peak uncertainty. Once an options strike price and stock price are identical, the options profit/loss is exactly $0, meaning if you sold at that moment with nothing else affecting the option, you would receive exactly what you paid for the option. Since the options value is now driven almost entirely by time and volatility, theta becomes the dominant force. Each passing day erodes the potential for movement, and the market prices that erosion ruthlessly. If the option falls above/below the strike price, its "fate" as a profit/loss becomes more predictable, making other factors other than time more important for the value of the option. One of the other things that judges the value of an option is implied volatility.
However, don't make this scare you away from buying an option at the money or near it! If the stock price increases/decreases dramatically, theta falls off a cliff. Take a look at these two QQQ options expiring in around a month, a 5% gain halves the theta decay! Of course, with the option expiring in a month, expect theta to be pretty high no matter what.
Implied Volatility (IV)
Implied volatility is the markets best guess at how much a stock might move in the future. The measure of % shows how wild or calm the option is predicted to be. Basically:
High IV = market expects big moves (think of a stock like Tesla, which frequently goes up and down massively)
Low IV = the market expects small moves (Think of a company like ford, which generally has a calmer market)
Generally, you want to buy an option when the IV is low, and hope that it goes up over time. This can help your option gain more value over time and give you a greater chance of your option expiring for a profit. Buying when the implied volatility is high can be risky, because if the IV goes down (also known as IV crush) your option can lose value, even if the option is going in the direction you want. You can use this link to see the implied volatility over time, and figure out if now is a good time to buy the option or not, Price History & Volatility Dates
Low IV Often Means Calm Market: If the underlying asset is quiet, it might stay quiet. You need a catalyst—earnings, news, macro shift—to trigger movement.
Theta Still Works Against You: Even with low IV, time decay (theta) eats away at the option’s value daily. If the stock doesn’t move, you still lose.
IV Can Stay Low: Just because IV is low doesn’t mean it’ll rise. If you’re wrong about the timing, you’re stuck with a decaying asset.
IV tends to affect options at-the-money the most: This is because an option at the money is the most uncertain in option value, meaning other factors such as theta and implied volatility crashing/rising impact the price more.
Why does IV go up? IV tends to go up before a major earnings announcement or during market uncertainty. Other events like fed meetings or decisions also tend to rise implied volatility on most stocks. Some people might have the idea to "buy a call before a basically smashing earnings report". However, the problem is that everyone thinks that earnings are going to be great—or terrible. This makes IV rise due to uncertainty of the stock's direction, which can be a good time to make money. Once the earnings report (or other major event) happens, IV crushes and options values decrease too. So, if a person was right and the company had a smashing earnings report, they might only make a 20% gain—or even a loss, when they were expecting a 100-200% gain... all because of implied volatility. So, make sure to check those historical IV charts before buying an option! Below is a classic example of IV crush (Netflix), the dates April 20, Jul 20, and October 19 were earnings announcements. Image source: http://thetradinganalyst.com/iv-crush/
Liquidity
Here's the problem: if you tried an option that had a 90% chance of profit or a 10% chance of profit, which one do you think would sell faster? The answer obviously is the one with a 90% chance of profit, however this also taps into a deeper issue of liquidity with options. You see, if you are down 80% on an option, theta is crushing you, and the expiry is next week, you might want to really sell your option so you can at least keep the 20% you still have. The problem is this isn't always possible. Why? Because liquidity isn't just about value, it's about demand. If no one wants your option because of all the negatives (expiry date soon, theta decay, etc.) you're going to be trapped and have to hold that option or sell it for so cheap it would be basically worthless. Here are some terms you should understand:
Bid-Ask spread: The difference between what buyers are willing to pay (bid) and sellers are willing to sell (ask). Ask is almost always higher than the bid price.
Volume: Number of contracts(options) traded today. High volume = active market.
Open Interest (OI): The number of contracts that are "live". Meaning options that haven't been closed, exercised, or expired. The higher the OI, the easier it is to sell an option. High open interest means more traders are engaged with that option, but it does not guarantee tight spreads that you can sell your option for a fair price. OI reflects active positions—not necessarily demand or supply dominance.
Bid-Ask spreads and volume work in tandem. A lower volume means a higher bid-ask spread and vice versa. Generally, the closer you are to the current stock price with an options strike price, the higher the volume and the lower the bid-ask spread. A lower bid-ask spread means you get a better deal when you sell your option. For example, if you wanted to sell your options for $24, but the bid-ask was $22-$28, your option might sell for $22 instead of $24 if you didn't set a limit order. And even then, the limit order might not go through because of the high spread, and no one wants to buy your option at that price. This can be bad because the longer your option is waiting to be sold, the more time theta has to decay your option over time! Here's an example of Meta's option prices. As of writing this, Meta's current stock price is at $745.67. Notice the higher volume of 333 corresponds to a smaller bid spread (1.29% difference) compared to the second images volume of 7 (32.56% difference). This means a meta $750 call would be much easier to sell for a good and fair price compared to the $910 call. The discrepancy is because Meta's $750 call is much more likely to expire in the money, which means more liquidity.
Conclusion
After hearing all of this, you might still be confused! And that's ok! It took me months to fully understand options and how they work. If you have any questions about anything in this article, feel free to DM me on LinkedIn (or comment!). I would be more than happy to address any questions or concerns (you can also read this article multiple times, some things might click better). I threw a lot in this article, and I tried my best to explain these concepts in as simple detail as possible. One thing that I've come to the conclusion with options, is that they're just a tough but rewarding subject to learn. This article barely scratched the surface with what's possible. There are many more types of options like iron condors, butterfly spreads, and covered calls. There are also many more indicators that can be helpful such as delta, vega, gamma, and rho. But then I would cover and explain too much for a simple beginner article. I tried to give you all the most helpful indicators and explain the two most used options to make it easier to digest. I might do an article/post on some of these topics in the future, but you can also personally dm me if you want to talk about them too!
I hope you were able to learn something from my article about options or have furthered your curiosity in options/the stock market in general! Thank you for taking the time to read my article.
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