Options, explained honestly
A plain-English reference for people who want to understand options from the ground up: calls and puts, what a premium is made of, the Greeks, how common strategies pay off, and how options are taxed in the US and Canada. We explain how they work. We don't send trade alerts, and we won't pretend options are a shortcut to weekly income.
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New to options? Read these in order. Each one builds on the last.
An option is a contract giving the buyer the right, but not the obligation, to buy or sell 100 shares at a set price by a set date. How buyers, writers, and the premium fit together.
Read the explainer →A call option is the right to buy 100 shares at a fixed strike price before expiration. Worked payoff tables for buying and writing calls, with breakevens and maximum gains and losses.
Read the explainer →A put option is the right to sell 100 shares at a fixed strike price before expiration. Worked payoffs for buying puts, using puts as insurance, and writing puts, with breakevens and max losses.
Read the explainer →An option's premium is intrinsic value plus extrinsic (time) value. How each part is calculated, what moves the price (stock, time, volatility, rates, dividends), and worked examples.
Read the explainer →How exchanges choose which strikes and expiration dates to list, the third-Friday convention, weekly and daily expirations, LEAPS, and the Canadian rules on the Montréal Exchange.
Read the explainer →What in the money, at the money, and out of the money mean for calls and puts, how moneyness affects price and risk, and worked examples comparing ITM and OTM options at expiration.
Read the explainer →What happens when an option is exercised: how OCC assigns it to a writer, the $0.01 automatic exercise rule, exercise cut-off times, early exercise, and why dividends trigger early assignment.
Read the explainer →American options can be exercised any day before expiration; European options only at expiration. How that plays out for stock options, SPX vs SPY, AM vs PM settlement, and cash vs physical delivery.
Read the explainer →A column-by-column guide to an options chain: strikes, bid and ask, last price, volume, open interest, implied volatility, and delta, with a worked hypothetical chain and the real cost of the spread.
Read the explainer →How listed options are traded and cleared: exchanges, OCC as guarantor, market makers, the Montréal Exchange and CDCC in Canada, and how splits and special dividends adjust contracts.
Read the explainer →Strategies
How each common strategy is built, where it makes and loses money, and what can go wrong, with payoff tables.
How a covered call is built from 100 shares and one short call, with a payoff table, max gain, max loss, breakeven, assignment risk, and what decades of buy-write index data show.
Read the explainer →How vertical spreads are built from two options at different strikes, debit vs credit, with payoff tables, max gain, max loss, breakevens, early assignment, and pin risk.
Read the explainer →How an iron condor is built from a bull put spread and a bear call spread, with a payoff table, max gain, max loss, breakevens, time decay, volatility, assignment risk, and what can go wrong.
Read the explainer →Pricing & Greeks
Time value, implied volatility and the Greeks, with the numbers worked through.
What each option Greek measures, how to read them on a chain, and a worked example showing how delta, gamma, theta, and vega combine to move an option's price.
Read the explainer →What implied volatility is, how it differs from historical volatility, why option prices collapse after earnings (IV crush), and how Cboe calculates the VIX.
Read the explainer →How the Black-Scholes model prices an option, step by step with real numbers, what its assumptions are, how put-call parity links calls and puts, and where the model breaks down.
Read the explainer →Risk
Leverage, decay, assignment, expiration surprises, and what the research says about retail traders.
The real risks of trading options, with arithmetic: how leverage cuts both ways, why buyers often lose the whole premium, why naked calls have no loss limit, and how spreads and assignment bite.
Read the explainer →What peer-reviewed studies find about retail options returns, and the mechanics behind the losses: bid-ask spreads, time decay, overpaying for volatility, and lottery-like payoffs.
Read the explainer →What zero-days-to-expiration (0DTE) options are, how daily SPX expirations made them possible, Cboe's dated volume figures, and the gamma and time-decay arithmetic behind their risk.
Read the explainer →Accounts & taxes
How options are taxed, approved and regulated in the United States and Canada. Education, not tax advice.
How the IRS taxes stock and index options: buyers vs writers, exercise and assignment basis rules, the Section 1256 60/40 rule, Form 6781, wash sales, and straddles.
Read the explainer →How the CRA taxes options: capital vs income account, buyers vs writers, section 49 rules for premiums, ACB adjustments on exercise and assignment, and superficial losses.
Read the explainer →Why brokers approve you before you can trade options: FINRA Rule 2360, the Options Disclosure Document, CIRO derivatives account rules in Canada, and how approval tiers work.
Read the explainer →Deep dives
Volatility surfaces, parity, hedging and the volatility risk premium, with the maths worked through and the research named.
Why equity index options trade at different implied volatilities by strike and expiry, how skew appeared after 1987, how desks model surface moves, and what a risk reversal trades.
Read the explainer →Why a delta-hedged option's P&L is gamma against theta, how realized versus implied volatility decides the result, and what hedging frequency, costs, and jumps do, with simulations.
Read the explainer →How Cboe calculates the VIX from a strip of SPX options, a worked calculation, how VIX futures and options settle to the SOQ, the term structure, and why long VIX products lose value.
Read the explainer →Institutional
Market-maker hedging, dealer gamma, structured products, option-income funds and clearing: the institutional side of options.
How professional options market makers quote, absorb customer flow, hedge delta and vega, size risk limits, and which exchange obligations and regulatory exemptions shape the business.
Read the explainer →How option dealers' hedging can dampen or amplify stock and index moves, what the research on pinning, intraday momentum, and 0DTE gamma actually finds, and why gamma exposure estimates mislead.
Read the explainer →How short-volatility ETPs lost about 96% in one evening: the VIX spike, the daily rebalance feedback loop, XIV's acceleration clause, SVXY's -0.5x reset, and what regulators found.
Read the explainer →Quick answers
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From the TradingFuse portfolio
How Do Options Work? is an education site in the TradingFuse portfolio. The other publications run a daily editorial. Recent notes below; click through for the live tape.
Why this site exists
Most options content is selling something: an alert service, a "weekly income" course, a broker referral, a Discord group. This site is a straightforward reference, published openly by TradingFuse, written to be accurate rather than persuasive.
The honest truth, stated up front: options are leveraged, short-dated options decay fast, and the research on retail traders shows most lose money. Understanding how options are priced won't change those odds on its own, but trading options without understanding them is far worse.
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