Option Basics

Lesson /16
Option Basics Sample Lesson
  • You will understand that there are two ways to represent options' risk / reward profiles graphically -- the Range of Exposure method and the Hockey Stick method.
  • You will understand why longer time horizons and directionality are crucial to the investor perspective.
  • You will understand how the goals of "inventoriers" differ from those of investors (this later ties into the difference in graphical representation)
  • You will understand why Ranges of Exposure diagrams are superior for those with an investor perspective.

This course will teach you the essential jargon and features of listed options and show you how options can allow investors to tailor the “ranges of exposure” of an underlying asset to suit their risk / return preferences. Because a picture is worth a thousand words, we teach this material through our preferred convention for graphically representing option positions.

The course…

  • introduces the concept of ranges of exposure and shows how they apply to stocks, futures, and options,
  • teaches you the jargon that is essential to know when investing with options along with the concepts underlying that jargon,
  • shows you the earliest method for approximating option prices, the rule of Put-Call Parity,
  • introduces and explains shorting in the context of stocks, futures and options,
  • introduces the topics of complex option positions and overlays,
  • introduces the common “hockey stick” method of graphically representing option risk and return, and
  • explains how different types of investors are served by viewing options in a certain way or another.

The snippet from the video you see above is from the lesson “Perspectives: Option Visualization” and talks about why investors might want to view options differently from inventoriers.

Our overall goal is to offer you an understanding of the fundamental similarity between options and stocks and to allow you to clearly see the risk and return tradeoff when investing with options. We believe this course will open your eyes to the potential of using options as an investing tool.

Supplemental Resources