WTF Are Options? We Demystify How to Use Contracts, Greeks, and Time Decay Without Getting F*cked
- Mark Sarkadi, MBA
- Mar 27
- 12 min read
Updated: May 23
Alright, let’s start from the beginning. You keep hearing about options, how they make people rich overnight (or destroy their bank accounts just as fast), and now you wanna know what the hell they actually are. Good. Because right now, you’re dumber than a crypto influencer promising “risk-free” 1000% returns. But don’t worry—I got you.
WTF are options?
You know how buying stocks means you own a little piece of a company? Options don’t do that. Instead, options are contracts that let you control a stock without actually owning it. They’re basically side bets on where a stock will go, but with rules, time limits, and an expiration date that’ll f*ck you over if you’re not careful.
Think of it like this:
Stock trading = Buying a house because you think it’ll go up in value.
Options trading = Renting the house with an agreement that you can buy it later at a fixed price. If the price skyrockets, you buy it cheap and flip it for a profit. If the price drops, you walk away.
The key term that you will hear everywhere when it comes to options is:
Options give you the right, but not the obligation to buy or sell a stock at a set price before a certain date.
If the stock moves the way you predicted, you can make a sh*tload of money. If it doesn’t, you can lose 100% of what you paid—fast.
Calls vs. puts: the two types of options
Now, before you start thinking this is just stock trading with a cooler name, let’s talk about the two kinds of options you can trade:
Call Options = Bullish / Long options = The “Stock Goes Up” Bet
A call option is basically saying, “I think this stock is going to the f*cking moon.”
When you buy a call, you’re betting the stock goes up.
If the stock rises above your strike price, the call increases in value.
If the stock stays the same or drops, your call turns into a flaming pile of worthless garbage.
Example:
Tesla is trading at $200.
You buy a $200 call for $5 per share ($500 total, since options control 100 shares per contract).
If Tesla jumps to $220, your option might now be worth $20 per share ($2,000 total).
You sell for a $1,500 profit.
If Tesla stays at $200 or drops, your option expires worthless and you lose your entire $500.
Put Options = Bearish / Short options = (The “Stock Goes to Sh*t” Bet)
A put option is basically saying, “This stock is f*cked, and I’m gonna cash in on its downfall.”
When you buy a put, you’re betting the stock goes down.
If the stock drops below your strike price, the put increases in value.
If the stock stays the same or goes up, your put dies and so does your money.
Example:
Tesla is trading at $200.
You buy a $200 put for $5 per share ($500 total).
If Tesla drops to $180, your option might now be worth $20 per share ($2,000 total).
You sell for a $1,500 profit.
If Tesla stays at $200 or rises, your option expires worthless and you lose your $500.
Strike price
The strike price is the price where your option actually kicks in. If you buy a call, the strike price is what you can buy the stock for. If you buy a put, it’s what you can sell the stock for. The closer the stock price gets to your strike, the more valuable your option might become. If it never crosses the line, your option expires worthless. Simple as that.
Premium
The premium is the cost of buying an option. It’s like paying a cover charge to get into a club—you might have the best night of your life, or you might waste your money and get kicked out in an hour. If you buy an option, you pay this upfront to take the bet. If you sell an option, you collect the premium—meaning you get paid to take the risk.
Intrinsic vs. extrinsic value: what’s actually making your option worth something?
Alright, now we’re getting to the real reason options have value. When you buy an option, its price isn’t just based on whether the stock moves—it’s a mix of real value (intrinsic) and hopeful value (extrinsic).
Intrinsic Value = The real, actual value right now
If you exercised your option today, intrinsic value is how much you'd make instantly.
Formula:
Call Option: Stock Price - Strike Price
Put Option: Strike Price - Stock Price
If the result is negative or zero, the option has no intrinsic value.
Example (Call Option):
Tesla is at $220. You have a $200 call.
You could buy at $200 and sell instantly at $220, making $20 per share.
Your option has $20 of intrinsic value.
Example (Put Option):
Tesla is at $180. You have a $200 put.
You could sell at $200 when the stock is only worth $180, making $20 per share.
Your option has $20 of intrinsic value.
Extrinsic Value = the "hope" that the dtock moves
This is the extra money you pay for time and volatility.
Even if your option has zero intrinsic value, it might still have extrinsic value.
If a stock is $200, a $220 call might still cost $5 just because there's a chance it moves up before expiration.
Example:
Tesla is at $200. You buy a $220 call for $7.
Right now, it has $0 intrinsic value (it’s out of the money).
But it has $7 extrinsic value because there’s still time left for Tesla to move.
If Tesla stays at $200, your option will lose all extrinsic value and expire worthless.
Understanding ITM, ATM, and OTM: why it matters in options trading
Before you even think about trading options, you need to understand where your option stands in relation to the stock price. This is called moneyness, and it determines whether your option has real value (intrinsic value) or if it’s just a hopeful bet (extrinsic value). Knowing this is crucial because it affects how much your option costs, how fast it moves with the stock, and how much time decay eats away at it. If you don’t get this part right, you’re flying blind, and you’ll watch your trades melt like ice cream in the sun.
Every option falls into one of three categories:
In-the-Money (ITM) → Has real, immediate value.
At-the-Money (ATM) → Right on the edge, most volatile.
Out-of-the-Money (OTM) → No real value, just potential.
In-the-Money (ITM): the rich kid option
These are the premium VIP tickets of the options world — expensive as hell, but you actually get something real for your money. An ITM option already has intrinsic value, meaning if you exercised it right now, you’d walk away with actual profit. No hoping, no praying — just straight-up cash on the table. Plus, ITM options move almost dollar for dollar with the stock, so when Tesla sneezes, your option doesn’t have a heart attack — it moves smooth and predictable.
At-the-Money (ATM): the gamble option
ATM options sit right on the line between profit and worthless trash, which is why they’re the most bipolar f*ckers in the options chain. They’ve got zero intrinsic value — you’re paying entirely for potential. But that potential? It’s explosive. If the stock even flinches in your favor, their price can skyrocket — or collapse just as fast if the stock plays dead. Buying ATM is like walking into a casino with a suitcase of cash and asking the dealer to punch you in the face if you’re wrong. High reward, high pain.
Out-of-the-Money (OTM): the cheap lottery ticket option
OTM options are the broke degenerate’s favorite drug — dirt cheap, but they almost always expire worthless. They have no real value, only the hope that the stock moves fast enough to make them worth something. If Tesla doesn’t hit your pipe dream price before expiration, you might as well have lit your money on fire — but if it does, OTM options can blow up into legendary gains. You won’t get there often, but when you do, you’ll never shut up about it.
Option Type | In-the-Money (ITM) | At-the-Money (ATM) | Out-of-the-Money (OTM) |
Call | Stock Price > Strike Price | Stock Price = Strike Price | Stock Price < Strike Price |
Put | Stock Price < Strike Price | Stock Price = Strike Price | Stock Price > Strike Price |
Risk | Lower risk | Medium risk | High risk |
Price | Most expensive | Medium-priced | Cheapest |
Example with a $100 Stock (Call Options)
Strike Price | ITM/ATM/OTM? | Intrinsic Value | Extrinsic Value | Option Price |
$80 Call | ITM | $20 | $3 | $23 (Most expensive) |
$100 Call | ATM | $0 | $5 | $5 (Medium price, highest extrinsic value) |
$120 Call | OTM | $0 | $2 | $2 (Cheapest) |
ITM ($80 Call) → Expensive because you’re paying for actual value ($20) + extra time value.
ATM ($100 Call) → No intrinsic value, but still expensive because it's right on the edge.
OTM ($120 Call) → The cheapest because it only has time value, and the stock needs a big move to be profitable.
Key Takeaways:
ITM = Most expensive but safest (already profitable if exercised).
ATM = Middle price, most volatile (highest extrinsic value).
OTM = Cheapest but riskiest (all hope, no real value).
WTF are "The Greeks"
Now that you know where your option stands (ITM, ATM, OTM — good job, you can read), it’s time to meet the real puppet masters — The Greeks. You might have heard the term before and wondered WTF does Plato, Alexander The Great or Aristotle has to do with the price of TSLA stocks. Well nothing. "The Greeks" is a term used for the greek letters that are on an optiopnscontract. These little mathematical pricks are the ones deciding whether your option’s price climbs like a horny monkey or melts like a McFlurry in August. If you don’t understand them, you’re not trading — you’re guessing. So let's look at them one by one:
Delta (Δ): your option’s wingman
Delta is your option’s best buddy — it tells you how much your option price changes when the stock moves $1. Think of Delta as the sensitivity meter. If you own a call option with a Delta of 0.50, every time Tesla’s price goes up $1, your option’s price goes up $0.50 per share (since one contract covers 100 shares, that’s $50 total). If Tesla drops $1, you lose that same $50. It’s like riding shotgun with the stock, but you’re in the passenger seat, not the driver.
The closer your option gets to In-the-Money (ITM), the higher your Delta climbs — because the option is becoming more valuable, with less "hope" and more real value. Deep ITM options have Deltas close to 1.00, meaning they basically move dollar for dollar with the stock — they’re less of a gamble and more like a leveraged version of owning the stock itself. For puts, it works the same way, just in reverse. A put’s Delta is negative, because you’re betting the stock will drop. A put with Delta -0.50 makes $50 if the stock drops $1 — and loses $50 if the stock goes up $1. Puts are the stock market’s version of rooting for everyone to crash and burn.
Bottom line — Delta tells you how much you make (or lose) when the stock moves $1. Higher Delta means your option moves faster, lower Delta means it barely reacts unless the stock explodes.
Gamma (Γ): Delta’s hyperactive little brother
Gamma is the Greek that turbocharges Delta. Delta is how much you make when the stock moves now. Gamma tells you how much Delta itself changes if the stock moves $1 more. It’s like stacking nitrous on top of a turbocharger. Let’s say you buy a Tesla call with a Delta of 0.50 and a Gamma of 0.10. If Tesla climbs $1, your Delta jumps from 0.50 to 0.60 — meaning after the next $1 move, you make $60 instead of $50. Gamma accelerates how fast your option responds to the stock price moving.
This is why options that are At-the-Money (ATM) — where the stock price and strike price are the same — have the highest Gamma. They sit right on the edge, and even a tiny move can send Delta shooting up (good if you’re right, deadly if you’re wrong). If you like your options to behave like calm, predictable adults, stick with ITM options (low Gamma). If you want your trades to feel like chugging a Four Loko at a funeral, buy ATM options — these things can double in value or go to zero in minutes if the stock twitches.
Theta (Θ): the grim reaper (a.k.a. time decay)
This is the Greek you’re fighting every single day you own an option. Theta = Time Decay, the constant erosion of your option’s value as the clock ticks down to expiration. Even if the stock doesn’t move at all, your option loses value every day — because options are like milk: they have an expiration date, and they rot the closer you get.
This decay kills Out-of-the-Money (OTM) options the fastest, because they’re 100% hope (extrinsic value) — if the stock doesn’t move in your favor, the entire option melts into worthless goo. The shorter the expiration date, the faster Theta kills your option. If you’re holding weeklies, Theta is basically kicking you in the nuts every hour. Longer-dated options lose value slower, but time decay never sleeps — it’s always nibbling away at your premium. Option sellers love Theta, because they collect that decaying premium as profit. They’re like landlords — just sitting there watching your money slowly disappear into their pockets. If you’re buying options, time decay is your enemy. If you’re selling them, Theta is your sugar daddy.
Vega (V): how hard volatility screws you
Vega is how sensitive your option is to changes in Implied Volatility (IV) — and IV is the market’s best guess at how wild the stock’s going to act in the future. The crazier the expected moves, the higher IV goes, and the more expensive options get. Vega tells you how much your option’s price changes when IV moves by 1%. If your Vega is 0.10, and IV jumps 5%, your option’s price increases by $0.50 per share (because 5 x 0.10 = 0.50). That’s $50 per contract.
This is why options get stupid expensive right before earnings — everyone expects big moves, so IV spikes, and options get pumped full of extrinsic value. The second the news drops, IV collapses — this is called IV Crush — and options prices nuke themselves. That’s the cruel part — you can bet the right direction and still lose money because Vega and IV crushed your option’s price faster than Theta ever could. If you’re buying options, you want low IV when you enter and higher IV later. If you’re selling options, you want high IV when you sell and lower IV after.
Rho (ρ): the Greek nobody cares about
Rho measures how much your option price changes if interest rates change — and let’s be honest, unless you’re trading long-term options, you don’t give a single f*ck about Rho. It’s like knowing the weather forecast for next year’s Halloween party — technically useful, but totally irrelevant to the insane sh*t happening right now. If you’re trading short-term options (anything under a year), forget Rho exists. If you’re buying LEAPS (long term options), maybe — and I mean maybe — you check it.
Quick Greeks Cheat Sheet:
Greek | What It Measures | How It Affects Option Price |
Delta (Δ) | How much the option moves when stock moves | Higher Delta = Bigger price moves |
Gamma (Γ) | How fast Delta changes | Higher Gamma = More volatility |
Theta (Θ) | Time decay (loss of value over time) | Closer to expiration = Faster decay |
Vega (V) | Sensitivity to volatility (IV) | Higher Vega = More IV impact |
Rho (ρ) | Sensitivity to interest rates | Only affects long-term options |
So to sum up everything nicely. Every option you buy (or sell) is at the mercy of these little mathematical bastards:
Delta tells you how much money you make (or lose) when the stock moves $1.
Gamma tells you how fast your Delta changes if the stock keeps moving.
Theta (Time Decay) tells you how much you lose every day just for existing.
Vega tells you how much volatility (IV) jacks up or slashes your option’s price.
Rho… exists, I guess.
If you trade without knowing how these work, you’re not a trader — you’re just another clueless degenerate lighting your money on fire and praying the smoke spells "tendies."
But real players? The ones who actually make consistent money with options? Half the time they’re not buying sh*t — they’re selling options and getting paid to do absolutely nothing.
That’s where these two beautiful bastards come in: Covered Calls and Cash-Secured Puts — strategies for lazy f*cks who want to get paid just for waiting.
Covered calls vs cash-secured puts: get paid to chill
Tired of YOLOing calls and praying to Elon? Time to act like a landlord and get paid upfront for just sitting there. Both covered calls and cash-secured puts are ways to collect premium (money) just for being willing to sell or buy stock.
Covered call – get paid to sell your shares at a higher price
You own 100 shares. You sell a call on them. You get paid premium upfront, and if the stock stays under your strike price, you keep your shares and the premium. If the stock pops, you sell at the agreed price (strike) — still making money, just capped profit.
Example
You own 100 Tesla shares at $200.
YOu sell $220 call for $5 = $500 premium.
If Tesla stays below $220, You keep the stocks + $500 premium.
If Tesla goes above $220, you sell the shares at $220, and still keep the $500 premium.
Cash-secured put – get paid to buy stock at a discount
You want to buy 100 shares. Instead of waiting, you sell a put and get paid premium upfront just for being willing to buy if the stock drops. If the stock doesn’t fall, you keep the cash and never buy the stock.
Example
Tesla’s $200, you sell $180 put for $5 = $500 premium.
If Tesla stays above $180, you keep $500.
If Tesla drops below $180, you buy 100 shares at $180 — but your real cost is $175 (strike minus premium).
So basically, covered calls and cash-secured puts are options trading for people who don’t want to chase sh*t. It’s getting paid just for showing up — whether you end up selling your shares, buying some stock, or doing absolutely nothing. Instead of bleeding cash to buy options and praying for miracles, you flip the script and become the one collecting premium while time decay does all the dirty work for you.
Strategy | What You Do | Goal | Risk |
Covered Call | Sell a call on stock you own | Get paid while holding shares | If stock skyrockets, you must sell at strike price |
Cash-Secured Put | Sell a put while holding cash to buy | Get paid while waiting to buy a stock | If stock drops, you must buy it |
Premium Income | Money from selling options | Make passive income | Option could be exercised |
It’s the difference between being the sucker buying lottery tickets and being the guy selling scratch-offs at the gas station. You’re not swinging for the fences — you’re stacking small, consistent paydays just for having some cash or shares ready to go. It’s slower, it’s smarter, and it’s how the real players milk the market without breaking a sweat.
Now you actually get what the hell options are — they’re not just some mystical Wall Street voodoo or quick-rich lottery tickets (well, sometimes they are). They’re contracts that let you bet on a stock’s future without ever owning it, with the potential to make stupid amounts of money or lose every penny if time decay eats you alive. Options are powerful as f*ck if you know how to handle them — but if you go in blind, they’ll chew you up and leave you wondering why your account looks like a crime scene. Now you’re no longer that clueless idiot — you actually know what you’re holding. Now go out there and dump this knolwede on a first date, I am sure they will love it.