Options Basics: Calls, Puts, Moneyness & the Greeks

The vocabulary every other module assumes — contracts, intrinsic vs. extrinsic value, and the four Greeks that drive an option’s price.

An option is a contract giving the buyer the right — not the obligation — to buy (call) or sell (put) 100 shares of an underlying at a fixed strike price $K$ before or at expiration. The buyer pays a premium; the seller ("writer") collects it and takes on the obligation.

Calls vs. puts

Call — the right to buy at $K$ . Gains value as the underlying rises.
Put — the right to sell at $K$ . Gains value as the underlying falls.

Moneyness

For an underlying trading at price $S$ :

	Call	Put
In the money (ITM)	$S > K$	$S < K$
At the money (ATM)	$S \approx K$	$S \approx K$
Out of the money (OTM)	$S < K$	$S > K$

Intrinsic vs. extrinsic value

An option's premium splits into two parts:

$\text{Premium} = \text{Intrinsic} + \text{Extrinsic}$

Intrinsic value is what you'd capture by exercising right now ( $\max(S-K,0)$ for a call). Everything else is extrinsic (time + volatility) value, which decays to zero by expiration.

The four Greeks

Delta ( $\Delta$ ) — change in option price per $1 move in the underlying. Also a rough probability of finishing ITM.
Gamma ( $\Gamma$ ) — how fast delta changes; highest near the money and near expiry.
Theta ( $\Theta$ ) — daily time decay. Negative for buyers, positive for sellers.
Vega — sensitivity to a 1-point change in implied volatility (IV).

Beginner takeaway: buying options is long volatility and fights theta; selling options is short volatility and collects theta. Every strategy below is just a way of combining these to express a specific view.