Informational Text – What Is Options Trading?

Options trading involves contracts that give traders the right—but not the obligation to buy or sell a stock at a set price before a certain date. Instead of owning shares directly, an options trader controls a contract that is linked to the stock’s price.

Options create flexibility. Traders can use them to speculate on price direction, hedge an existing position, or generate income. For example, a trader might buy a call option if they expect a stock to go up, or buy a put option if they fear a big drop.

Options also introduce elements that do not exist in simple stock trading. The value of an option is shaped by:

• Time Decay (Theta) – Every option has an expiration date. As time passes, the “time value” of the option slowly melts away. This means an option can lose value even if the stock price does not move.
• Volatility (Vega) – Options become more expensive when big moves are expected and cheaper when the market is calm. A stock with a major news event coming soon usually has higher volatility priced into its options.
• Delta – Delta measures how much the option price moves when the stock price changes by one dollar.
• Gamma – Gamma shows how quickly Delta itself can change as the stock moves.

Because options are leveraged instruments, small movements in the stock price can lead to large percentage gains—or losses. This leverage makes options powerful, but it also demands strong risk management and a clear plan.

Scenario Example – CloudCore Earnings Call Option

CloudCore, a major tech firm, is about to release earnings. A trader believes the results will be stronger than the market expects. Instead of buying 100 shares of CloudCore, they choose to buy a call option with a strike price slightly above the current market price.

When earnings beat expectations, the stock gaps up sharply at the open. Because the call option controls 100 shares with a relatively small up-front cost (the premium), its value increases much faster, in percentage terms, than the stock itself.

The trader can now sell the call option for a significant profit, even though they never owned the actual shares. In this example, they used options to express a bullish view while risking less capital—and letting Delta, Vega, and the surprise move work in their favor.

Process Summary – How Options Traders Think

• Determine directional belief – Decide if your view on the stock is up, down, or neutral.
• Choose the appropriate option – Select a call, put, or spread that matches your view and risk tolerance.
• Evaluate volatility and expiration – Check how much time is left and whether volatility is high or low before entering the trade.
• Enter the contract – Pay the premium to open your position.
• Exit based on price movement, time decay, or volatility changes that affect your risk and reward.

Key Vocabulary

• Call Option – The right to buy a stock at a specific price (the strike) before expiration.
• Put Option – The right to sell a stock at a specific price before expiration.
• Strike Price – The price at which the option can be exercised.
• Premium – The cost of purchasing the option contract.
• The Greeks – A set of metrics (Delta, Gamma, Theta, Vega, Rho) that measure how sensitive the option is to price, time, volatility, and interest rates.

Cross-Strategy Vocabulary Use:

• Volatility → Day Trading, Momentum Trading, Futures
• Hedging → Futures Trading, Position Trading

Lesson Flow – How the Session Unfolds

Learning Target: I can explain how options work and use the Greeks to understand how option prices change.

Essential Question: What makes options more flexible—but also more complex—than buying stocks?

Bell Ringer: Students label a simple call option payoff diagram, showing where the trade loses the premium, breaks even, and begins to profit.

Mini-Lesson: The instructor explains calls vs. puts, how time decay works, and how volatility affects premium prices. Students see why an option can lose value even if the stock barely moves.

Modeling: The CloudCore earnings example is walked through step by step. Students watch how a bullish view is expressed through a call option instead of stock, and how the Greeks shape the outcome.

Guided Practice: Students match real-world scenarios (earnings, protection, neutral outlook) to the correct option strategy (call, put, or spread).

Independent Practice: Students identify how a change in Delta or Theta would affect a specific trade and explain why.

Closure: Students respond to: “Why might a trader choose an option instead of simply buying the stock?”

Exit Ticket: Define premium and explain one factor that can increase it.