Year 2 · Core Finance · Derivatives
Options & Option Greeks
Move from option payoff diagrams to professional risk thinking: intrinsic and time value, moneyness, put-call parity, Black-Scholes intuition, delta, gamma, vega, theta, rho, implied volatility, volatility skew, delta hedging and option strategies.
LEARNING OBJECTIVES
What you should be able to explain after this lesson
01
Distinguish moneyness, intrinsic value, time value, payoff and profit.
02
Apply put-call parity and no-arbitrage logic to European options.
03
Understand the economic intuition behind Black-Scholes inputs and assumptions.
04
Interpret delta and gamma as first- and second-order spot sensitivities.
05
Interpret vega, theta and rho and understand common quotation conventions.
06
Read implied-volatility smiles and skews, construct delta hedges and understand residual option risk.
CONCEPT MAPFrom option contract to option-risk book
Strike and spot determine intrinsic moneyness — not whether the trade is profitable
CORE FACTS · SAME IN EVERY MODE
A call is in the money at expiry when spot exceeds strike; a put is in the money when strike exceeds spot.
At-the-money and out-of-the-money describe the relationship between underlying price and strike, not the investor's profit.
Moneyness before expiry can be defined in several ways, including spot/strike or forward/strike conventions.
Exercise style matters: European options are exercisable at expiry, while American-style options can generally be exercised earlier subject to contract terms.
BeginnerTeaching style changes, knowledge does not.
A call with strike $100 and stock at $120 is $20 in the money because exercising lets you buy at $100 something worth $120. But if you originally paid a $25 premium, the trade is still down $5 at expiry. Moneyness and profit are different questions.
COMPARISON
Moneyness at expiry
| Option | ITM when | Intrinsic value |
|---|---|---|
| Call | S_T > K | max(S_T−K,0) |
| Put | K > S_T | max(K−S_T,0) |
PROFESSIONAL VOCABULARYMoneyness / moneyness Exercise style / style d’exercice / exercise style
Relationship between underlying price and option strike under a stated convention.
Rules determining when the holder may exercise an option.