Four Things to Know

Before you trade options, lock these four concepts into your brain. Everything else builds on them.

1. Options Expire

Unlike stocks, options have a deadline. After that date, the contract ceases to exist. This is the fundamental difference between stocks and options.

This means two things:

• You can't just "hold and wait" indefinitely like you can with shares
• Every day that passes costs you money (time decay)

If you buy an option with 30 days to expiration, the clock starts ticking immediately. The stock needs to move in your direction — and fast enough to overcome the time cost.

2. Time Costs Money

Every option's price includes a "time premium" — extra cost for the days remaining. This premium melts a little bit every day. Traders call this theta decay.

Here's what it looks like: a $100 call on a stock at $100 might cost $3.50 with 30 days left. If the stock doesn't move at all for 15 days, that option might be worth $2.30. You lost $1.20 per share — $120 per contract — just from time passing.

Time decay accelerates near expiration. The last week is brutal. An option can lose half its remaining value in the final 5 days.

Bottom line: When you buy options, you're in a race against the clock. When you sell options, the clock is on your side.

3. Volatility Affects Price

Implied volatility (IV) is how much the market expects a stock to move. High IV means expensive options. Low IV means cheap options.

The classic trap: you buy a call before earnings. IV is elevated because everyone expects a big move. The stock goes up 3% — but your option barely moves or even loses money. Why? Because IV collapsed after earnings (the uncertainty is gone), and the vega loss wiped out your delta gain.

Quick rule: Check if IV is high or low compared to its recent history before buying. Buying when IV is elevated means you're overpaying.

4. Breakeven Isn't the Strike Price

This trips up beginners constantly. If you buy a $100 call for $3.00, you don't profit when the stock hits $100. You profit when it hits $103 — the strike price PLUS the premium you paid.

For puts, it's the strike MINUS the premium. A $100 put bought for $3.00 needs the stock below $97 to profit.

Your breakeven at expiration = Strike + Premium (calls) or Strike - Premium (puts).

Always calculate your breakeven before entering a trade. If the required move seems unrealistic, the trade probably isn't worth taking.