Options Trading Cards | Greeks, Volatility, Risk

01 Basics

Intrinsic Value

Basics

Call: Stock − Strike
Put: Strike − Stock
If negative: intrinsic = 0

The real value locked inside the option right now — purely from price vs strike. Options can't have negative intrinsic; the floor is zero. An option with no intrinsic is out-of-the-money and you're paying entirely for time and expected movement.

Extrinsic Value

Basics

Time value
Volatility value
Declines as expiration nears

The premium you pay for uncertainty. Reflects time remaining and expected movement. Decays steadily even if the stock stays completely flat.

American vs European Style

Basics

American: can exercise any time
European: exercise only at expiration
Style depends on the product (stocks vs many indexes)

Option 'style' controls exercise timing. American-style options allow early exercise, which creates assignment risk for option sellers. Many index options are European-style, reducing early-exercise risk, but still require understanding settlement and expiration rules.

A/E

Breakeven & Expectancy

Basics

Call breakeven = strike + premium
Put breakeven = strike − premium
Your edge must beat decay + spreads + IV change

Direction isn't enough. The underlying must move beyond breakeven, and your P&L is affected by time decay, volatility, and execution costs. Expectancy improves when you match the structure to the regime (trend vs chop, high vs low IV).

02 The Greeks

Delta

Greek

$1 move sensitivity
Rough ITM probability
Higher delta = higher probability

How responsive the option is to the underlying. Higher delta = higher probability but less leverage. Lower delta is cheaper, but needs a bigger move to work.

Gamma

Greek

Delta acceleration
Highest in short DTE
Big moves = big swings

How fast delta changes when price moves. High gamma creates rapid P&L swings near expiration — why short-dated options can flip from calm to chaos quickly.

Theta

Greek

Loses value daily
Speeds up near expiry
Sellers benefit from decay

The cost of waiting. Buyers fight theta every day; sellers collect it. Accelerates sharply in the final days — your position bleeds faster than you expect.

Vega

Greek

Sensitivity to IV changes
IV up helps buyers
IV drop hurts buyers

How implied volatility changes affect option prices. Buy high IV and a drop can hurt you even when direction is correct — the classic IV crush trap.

Rho

Greek

Interest rate sensitivity
Matters most for long DTE
Minimal short-term impact

How rate changes affect option pricing. More relevant for long-dated options and rising rate environments, but generally minor for short-term trades.

03 Volatility

Implied Volatility

Volatility

High IV = expensive options
Low IV = cheaper options

The market's expectation of future movement baked into the premium. High IV inflates prices. Buying at high IV means you need the underlying to move enough to overcome premium decay — direction alone won't save you if IV contracts.

IV Rank

Volatility

IV vs 1-year range
High IVR → sell premium
Low IVR → buy premium

Where current IV sits relative to the past year. High IVR favors premium selling — more cushion. Low IVR favors buying if you expect volatility to expand.

IVR

Earnings & IV Crush

Volatility

IV rises into earnings
IV usually collapses after announcement

Options inflate pre-earnings as IV rises. After the print, IV usually drops hard — unless the move far exceeds expectations. Buy into earnings and you can lose money even when direction is right, because the premium deflates faster than the price move gains.

IV Percentile & Term Structure

Volatility

IV percentile: % of days IV was lower in a lookback
Term structure: front-month IV vs back-month IV
Steep front IV = event risk; flatter curve = calmer

IV Rank and IV Percentile are related but not identical. Percentile answers: 'How often was IV lower?' Term structure shows how volatility is priced across expirations. A front-month spike usually signals near-term event risk (earnings, macro, etc.).

Volatility Skew

Volatility

Puts often have higher IV than calls (crash premium)
Skew steepens in fear regimes
Impacts put buying/selling and spread selection

Skew is the IV difference across strikes. Put skew is common because downside protection is in demand. When skew is extreme, put spreads or collars can be more efficient than outright puts; when skew is mild, single-leg hedges may price better.

SKW

04 Timing & Expiration

0DTE

Timing

Extreme time decay
High gamma risk
Requires fast move

Ultra-sensitive to time and price. Premium evaporates without immediate momentum; small underlying moves swing delta hard. Total loss of premium is common. Treat as active scalps with strict risk limits — not investments, and never sized like them.

7–14 DTE

Timing

Fast decay zone
Active management required

Short contracts respond quickly but give little time to be wrong. Decay is meaningful and risk must be managed actively. Good for defined setups, not 'maybe it moves' ideas.

14D

30–45 DTE

Timing

Balanced risk
Professional sweet spot

The standard pro timeframe. Balances decay, flexibility, and liquidity. You can adjust or exit without the option melting instantly, and have time for the thesis to develop.

45D

60+ DTE

Timing

Slower decay
Higher premium cost

Longer-dated options decay slowly and give your trade more runway. Trade-off is higher premium and slower percentage moves. Best when your view needs time — macro, trend, long thesis.

60D

Expiration & Pin Risk

Timing

OTM can flip ITM after hours
Short options into expiry = surprise assignment risk
Close or roll before the final hour if unsure

Pin risk happens when the underlying finishes near your strike. Small late moves can change whether you're assigned, sometimes after the close. Avoid holding short options into expiration unless you're comfortable owning (or shorting) the shares and your sizing supports it.

05 Liquidity & Market Structure

Open Interest

Liquidity

Higher OI = better liquidity
Avoid thin contracts

How many contracts are currently open. Higher OI means tighter spreads and more reliable fills. Low OI can trap you in bad pricing right when you need to exit.

Bid-Ask Spread

Liquidity

Hidden transaction cost
Avoid wide spreads

The price you pay just to get in and out. Wide spreads destroy expectancy silently, especially in short-term trades. Always prefer liquid strikes where spreads stay tight.

B/A

Liquidity Checklist

Liquidity

Tight spread (in $ and %)
Healthy volume and open interest
Reliable mid fills; avoid 'ghost quotes'

Before entering, check that the contract trades cleanly. Liquidity affects slippage, exits, and your ability to adjust. Poor liquidity can turn a 'good idea' into an untradeable position.

06 Risk Management

Position Sizing

Risk

Risk 1–3% per trade
Never all-in on options

Your safety belt. Even good setups fail. Keep single-trade risk small so one bad day doesn't wipe you out. Consistency comes from survival, not from swinging big.

Exit Rules

Risk

Take profit at 50–70%
Cut losses early
Avoid expiry risk

Define exits before entry. Taking profits early reduces tail risk significantly. Holding into expiration increases assignment and gamma risk — don't wait for perfection.

Assignment & Early Exercise

Risk

Short calls can be assigned anytime (dividends matter)
Most pros sell-to-close, not exercise
Know your broker's exercise/assignment rules

American-style options can be exercised before expiry. Early assignment risk is highest on short ITM calls ahead of ex-dividend dates (and on deep ITM options with low extrinsic). If you're short, manage before expiry; if you're long, selling the option often preserves remaining extrinsic value.

Canada: Accounts & Practical Notes

Risk

Know your account rules (registered vs margin)
Assignment can create share positions unexpectedly
Taxes and fees vary — confirm with broker/pro

Canadian account rules and tax treatment can differ by account type and broker. The key is operational: understand what happens on assignment/exercise, your margin impact, and any fees or restrictions before trading complex structures.

07 Strategy

Buying vs Selling

Strategy

Buyers: defined risk, unlimited upside
Sellers: defined profit, potentially unlimited risk
Sellers benefit from time decay & probability

Buyers risk only the premium paid — loss is capped, gain is not. Sellers collect premium upfront but can face losses that far exceed what they received, especially on naked positions. Selling benefits from decay and high probability, but always requires a clear plan for managing the tail risk.

B/S

Daily Checklist

Strategy

IV Rank checked?
Theta acceptable?
Liquidity solid?
Exit plan defined?

Before every trade, pause and verify: volatility context, time decay, liquidity, and your exit plan. This quick check prevents emotional entries and sloppy sizing.

✓

Debit vs Credit Spreads

Strategy

Debit: pay premium, need a move
Credit: receive premium, need time/range
Choose based on regime (trend vs chop, IV high vs low)

A simple rule: trend + low IV often favours debit structures; chop + high IV often favours credit structures. The best traders match the payoff to the market regime, not the other way around.

D/C

Long Call

Strategy

Bullish thesis, defined risk
Best with IV reasonable + catalyst
Use 30–60 DTE for runway

Buy a call when you expect a directional move up and you want a capped loss (premium). You need price to move enough to beat time decay and any IV contraction. Prefer liquid strikes and avoid paying peak IV unless you expect volatility to expand.

Covered Call

Strategy

Own shares, mildly bullish/neutral
Sell calls to collect premium
Accept "capped upside"

Sell a call against stock you already own to generate income or reduce cost basis. Do it when you're okay selling shares at the strike (assignment risk) and when premium is attractive (often higher IV). Avoid selling calls if you expect an explosive upside move you don't want capped.

Long Put

Strategy

Bearish thesis or hedge
Defined risk, convex payoff
Watch IV (puts often pricey)

Buy a put when you expect a drop (or you need insurance). It's most effective when downside risk is underpriced and you want convex protection. Be careful buying puts into panic, when IV is already elevated — you can be right on direction and still lose to IV collapse + decay.

Cash-Secured Put

Strategy

Want to buy shares lower
Sell puts and hold cash
Premium collected up front

Sell a put when you'd be happy owning the stock at the strike and you're willing to tie up cash to cover assignment. You get paid premium for that commitment. Best used on liquid names with strikes you truly want, and sized so assignment is not a surprise "forced buy."

CSP

Vertical Spreads

Strategy

Debit spread: defined risk, defined reward
Credit spread: collect premium, defined max loss
Good when options are 'too expensive' outright

Verticals use two strikes in the same expiration. Debit spreads reduce cost (and reduce upside). Credit spreads benefit from theta and probability but require disciplined risk control. They're a core way to express a view with capped risk.

VERT

Calendar & Diagonal Spreads

Strategy

Same strike, different expirations (calendar)
Different strike + different expiration (diagonal)
Best when you expect time to pass with controlled move

Calendars/diagonals are volatility-and-time structures. They often like stable price action and benefit from favourable term structure. They can be powerful, but Greeks can shift quickly if the underlying runs hard.

CAL

Straddles & Strangles

Strategy

Long: bet on big move (direction unknown)
Short: bet on small move (collect decay, high risk)
Earnings trades live here — IV crush matters

These are 'volatility trades'. Long versions require movement to beat premium and decay; short versions profit from decay and IV collapse but can face large losses on a surprise move. Position sizing is everything.

S/S

Iron Condor

Strategy

Sell a call spread + sell a put spread
Defined risk, range-bound thesis
Works best when IV is elevated and price chops

Iron condors aim to collect premium while keeping risk capped. They're popular in high-IV environments, but still require active management when price approaches a short strike.

Butterflies

Strategy

Defined-risk, 'pin the strike' structure
Cheap lottery ticket if you nail the level
Sensitive to timing and volatility changes

Butterflies are low-cost, defined-risk trades that pay if price finishes near a target zone. They can be useful around known levels, but P&L is very path-dependent.