Learn

An option is a contract giving you the right (not the obligation) to buy or sell 100 shares of an underlying stock at a specific strike price before a specific expiration date. The key word is right — you can let it expire worthless if it would lose you money.

Calls vs puts

• A call is the right to BUY 100 shares at the strike. You buy a call when you think the stock will go up.
• A put is the right to SELL 100 shares at the strike. You buy a put when you think the stock will go down, or as insurance on shares you own.

The premium

The price you pay for the option is called the premium. Premium has two parts:

1. Intrinsic value — how much the option is already 'in the money'. For a $100 call when the stock is $108, intrinsic is $8. 2. Extrinsic value — everything else: time value (longer to expiry = more) and implied volatility (higher = more expensive). Extrinsic decays to zero on expiration day.

The 100x multiplier

Every option contract controls 100 shares. So if a call premium is quoted at $3.50, you pay $3.50 × 100 = $350 for one contract. A 'cheap' $0.30 weekly is still $30 per contract — many traders blow up by forgetting this.

Reading an option chain

A chain shows all strikes and expirations side by side. Columns to know: bid (price buyers offer), ask (price sellers want), volume (today's contracts traded), open interest (contracts still alive), implied volatility (the market's read on future movement).

When you buy (go long) an option, the maximum you can lose is the premium you paid. You can be totally wrong about direction, timing, and volatility, and still your loss is capped.

When you sell (go short) an option without owning the underlying — a 'naked' short — your loss can be many multiples of the premium you collected. Short calls have theoretically unlimited loss (the stock could rip to $1000). Short puts cap at the strike but that can still be devastating on a large position.

This site focuses on long options (buying calls and puts, plus debit spreads). It does NOT encourage selling naked options unless you fully understand the math and have the margin to back it.

Why people sell options anyway

Because options decay. Over time, sellers collect that decay as profit if the stock stays in a range. Selling cash-secured puts on stocks you'd happily own is a common conservative income strategy — but it requires real capital set aside per contract.

The Tao stance

The five calculators in /valuation cover the long-side strategies: intrinsic vs extrinsic, long call, long put, call debit spread, put debit spread. If you need short-strategy math, you should already know enough to do it yourself.

The Greeks measure how an option's price changes when something else changes. You don't need to compute them — your broker shows them. You just need to know what they mean.

Delta (price sensitivity)

Delta is how much the option price moves for every $1 move in the stock.

• A call with delta 0.50 moves $0.50 when the stock moves $1.
• Delta also approximates the probability the option expires in the money.
• ATM (at the money) options have delta ~0.50. Deep ITM ~0.95. Far OTM ~0.05.

Gamma (delta's sensitivity)

Gamma is how fast delta changes. High gamma options (short-dated, ATM) flip from 'no chance' to 'sure thing' fast — they are the lottery tickets and the heart-attack trades.

Theta (time decay)

Theta is how much the option price drops every day from time decay alone, holding everything else constant. Theta is negative for long options (you lose value every day).

• A weekly with theta -0.30 loses $0.30 per day. That's $30 per contract.
• Theta accelerates dramatically in the final two weeks.

Vega (volatility sensitivity)

Vega is how much the option price moves for every 1-point change in implied volatility (IV).

• Earnings runs IV up. The day after earnings, IV crushes back down ('IV crush'), and your options can lose value even if the stock moves your way.
• High vega = high IV bet. Buying ahead of earnings means you're paying for the IV expansion AND the move — and IV crush often eats the move.

A losing streak is mathematically inevitable. Even a strategy with a 60% win rate hits a 10-trade losing streak roughly once per thousand trades. If you risked 10% per trade, that streak would draw you down 65% — which requires a 186% gain just to break even.

The drawdown math

| % lost | % gain needed to recover | |---|---| | 10% | 11% | | 25% | 33% | | 50% | 100% | | 75% | 300% | | 90% | 900% |

This is why the 1-2% rule matters: a 10-trade losing streak at 1% per trade is a 10% drawdown. Annoying. Recoverable. At 5% per trade, it's a 40% drawdown — career-ending for most.

Where the rule comes from

It came out of the trend-following commodity world in the 1980s (the Turtle Traders) and is now standard at every prop firm in the world. The exact number is a function of edge and personality, but if your strategy needs more than 2% per trade to be profitable, the problem is the strategy, not the size.

How to apply it on this site

Use the % risk per trade calculator in /valuation. Plug your account size, % risk (start with 1%), entry, and stop. It returns the share count. Don't size up because a trade 'feels' good — feel doesn't survive the math.

A stop-loss is your pre-arranged exit if the trade goes against you. Without one, you don't have a trade plan — you have a hope, and hope is not a risk strategy.

Placement options

1. Below recent swing low (longs). Tightest stop, fewest false triggers, but you must accept being right and still getting stopped on noise. 2. Below 20-day EMA. Trend-following stop. Works well for swing trades on uptrending stocks. 3. Below a key support level. Anchors to the chart. Less likely to be hit on noise but a wider stop = smaller position. 4. N × ATR below entry. ATR is the average true range — average daily move. 2× ATR is conventional. This auto-adjusts to volatility: wider stops on volatile names, tighter on quiet ones. 5. Time-based stop. 'If the trade hasn't worked in 3 days, exit.' Useful for catalyst trades where the move was supposed to happen by now.

Where NOT to put a stop

• At a round number ($100, $50). Algos hunt round-number stops. Place yours $0.10-$0.30 away.
• Right below the entry candle's wick. The whole point is to give the trade room to breathe.

Stops and options

Options have unique stop dynamics. A 30% drop in the option premium is a typical stop level — bigger than you'd use on shares because options swing harder. Use the % risk per trade calc with the OPTION price as 'entry' and your stop price as 'stop' to size correctly.

Moving averages smooth out price into a single trend line. Three are watched universally:

• 20-day EMA: short-term trend. When price is above the 20 and the 20 is sloping up, you're in a bullish swing.
• 50-day EMA: intermediate trend. The pullback zone in healthy uptrends. Watch for institutional reactions here.
• 200-day EMA: long-term trend. The line between bull and bear markets. Stocks above the 200 are in the bull camp; below = bear camp.

How traders use them

• Trend confirmation: 'price above all three' = clean uptrend. 'Price below all three with the 200 sloping down' = clean downtrend.
• Pullback entries: in uptrends, buying near the 50 with a stop below it is a classic bread-and-butter trade.
• Crossovers: 'golden cross' (50 crosses above 200) and 'death cross' (50 below 200) get press, but they're lagging. Use them as confirmation, not signal.

EMA vs SMA

EMA (exponential) weights recent prices more heavily, so it reacts faster. SMA (simple) is equal-weighted. Most modern traders default to EMA — recent price action matters more than ancient price action.

A support level is a price where buyers consistently step in (a floor). A resistance level is where sellers consistently step in (a ceiling). They are the most important features on any chart.

How to draw them

Find horizontal price areas where the chart has reacted multiple times — bounced off, stalled at, reversed at. Draw a horizontal line. The more reactions, the stronger the level.

Why they work

Two reasons. (1) Memory: traders who got stopped out at $50 once become eager sellers if it gets back there. (2) Order books: large limit orders cluster at obvious levels, creating real liquidity walls.

Levels flip

When a resistance level breaks and the stock holds above it, that level often flips into support on the next pullback. This is one of the highest-probability entry points in technical analysis: breakout, then retest the breakout level, then continuation.

Round numbers

$50, $100, $500 — round numbers act as psychological support/resistance even when nothing on the chart says they should. Algos place orders there, options strikes cluster there. Be aware.

The macro tape strip at the top of the News page shows seven instruments that drive equity markets:

• 10-year Treasury yield (^TNX) — the discount rate for every cash-flow valuation on Wall Street. Yields up → growth stocks under pressure. Yields down → growth stocks bid.
• VIX (^VIX) — implied volatility on the S&P 500. The 'fear index'. Above 20 = elevated, above 30 = panic.
• Dollar Index (UUP) — the US dollar vs a basket. Strong dollar pressures exporters (AAPL, NKE) and commodities.
• Gold (GLD) — the inverse-real-rates trade. Bid in inflation and crisis.
• Oil (USO) — energy stocks and consumer inflation. Spikes squeeze consumers.
• Bitcoin (BTC-USD) — proxy for risk appetite among retail and crypto-native funds.
• 20+ year Treasuries (TLT) — duration risk. Inverse to long yields.

If yields are spiking, dollar is up, VIX is rising — that's a risk-off setup and tech is usually weak. If yields are dropping and dollar is weakening, that's the classic 'risk-on, buy growth' setup.