A call gives exposure to upside. A put gives exposure to downside. But the option price also reacts to time, volatility, strike, and expiration.
Call
A call option increases in value when the underlying stock moves up, all else equal. Calls can still lose money if the move is too slow, volatility drops, or the entry premium was too high.
Put
A put option increases in value when the underlying stock moves down, all else equal. Puts are also affected by time decay and volatility.
Key terms
- Strike: the price the contract is based on.
- Expiration: the date the option expires.
- Premium: the amount paid for the option.
- Breakeven: the price needed at expiration to cover premium.
- Theta: time decay, usually working against long options.
Options journal fields
Record underlying, contract, strike, expiration, premium, quantity, entry time, exit time, max loss, catalyst, implied volatility context, and why that contract was chosen.
Question before entry
If the stock moves in your direction but the option does not pay you, what is the reason? If you cannot answer, size down or keep learning.