What are options? The Greeks and IV
An option is a contract that gives you the right, but not the obligation, to buy or sell something at a set price before a set date. You pay a premium for that right.
Calls and puts
- A call is the right to buy at the strike price. It gains value when the share rises.
- A put is the right to sell at the strike price. It gains value when the share falls.
One US equity option usually covers 100 shares. When you buy an option, the most you can lose is the premium. That's the appeal: defined risk with leverage.
What sets the price
An option's premium is made of two parts. Intrinsic value is what it would be worth if exercised now. Extrinsic value is everything else: the value of time and of uncertainty. The Greeks describe how that premium reacts when things change.
Price, time and value together
The Greeks
| Greek | Measures | Rule of thumb |
|---|---|---|
| Delta (Δ) | Change in option price for a $1 move in the share | Calls 0 to 1, puts −1 to 0. Roughly the odds of finishing in the money. |
| Gamma (Γ) | Change in delta for a $1 move | Highest at the money and near expiry. |
| Theta (Θ) | Value lost per day from time passing | Negative for buyers, positive for sellers. Speeds up near expiry. |
| Vega (ν) | Change in price for a 1 point move in IV | Biggest for long-dated, at-the-money options. |
| Rho (ρ) | Change in price for a 1% move in rates | Usually small, matters more for long-dated options. |
The useful way to think about them: delta is your directional exposure, gamma is how fast that exposure changes, theta is the rent you pay (or collect) each day, and vega is your bet on volatility itself.
Implied volatility (IV)
IV is the volatility the market is pricing in. It's backed out of the option price, not measured from history. High IV means expensive options, because the market expects big moves. Low IV means cheap options.
IV typically rises before known events like earnings and collapses straight after, which is called IV crush. That's why you can be right on direction and still lose money buying options: the drop in IV can outweigh the move.
Putting it together
Before buying any option, ask three things. Do I expect a move bigger than the premium implies? Will it happen before theta eats the position? And is IV already pricing it in? If the answer to any is no, the trade probably isn't worth it.
Educational content only, not financial advice. Options involve significant risk and are not suitable for everyone.