Build vocabulary before the wheel modules. Use external primers for teaching, then connect each idea to BigDipperOptions.
External sites are independent of BigDipperOptions. Links are for education only.
1. What is an option?
In plain terms, an option gives the buyer the right—not the obligation—to buy or sell an underlying (such as a stock) at a fixed exercise price before expiration. The seller collects premium and may be obligated if the buyer exercises. In the U.S., one standard equity option contract usually controls 100 shares of the underlying. When you see a quoted option price of $2.50, that is typically per share—so one contract often costs $250 plus fees ($2.50 × 100).Official definition (OCC)
An option is the right to buy or sell a specified amount or value of a particular underlying interest at a fixed exercise price by exercising the option before its specified expiration date. An option that gives the right to buy is a call option, and an option that gives the right to sell is a put option. Calls and puts are distinct types of options, and buying or selling of one type does not involve the other. Certain special kinds of options may give a right to receive a cash payment if certain criteria are met.Source: Characteristics and Risks of Standardized Options (PDF) – OCC
Key terms
Call vs put
Calls and puts are separate instruments—buying or selling one does not involve the other.
Further reading
On BigDipperOptions: Options Chain intro · Glossary2. Premium, buyers, and sellers
Every option trade has two sides:
Premium is not a “prediction” of profit. It is the market’s price for that right or obligation today. It generally moves with:
- Time left until expiration (more time often means higher premium)
- Distance between the stock price and the strike
- Volatility expectations (implied volatility / IV)—on BigDipperOptions, IV feeds the composite score so you can screen without raw broker columns; confirm live IV at your brokerage before you trade
- Interest rates and dividends (secondary for beginners)
Bid, mid, and ask
On your broker’s option chain, each contract usually shows three prices:
The spread (ask minus bid) is part of your real trading cost. A wide spread means you keep less when you sell an option, or pay more when you buy to close.
If you sell premium (puts or calls): you often open near the bid and close near the ask. Do not plan trades using mid alone—check live bid and ask at your broker before you order.
On BigDipperOptions: Price Direction Bias · Options Trend Graph
3. Strike, expiration, and moneyness
Options are identified by underlying + expiration + strike + call or put. Example: “AAPL Jan 17 2027 $200 call” means a call on Apple expiring on that date with a $200 exercise price. Days to expiration (DTE) is how many days remain until that expiry date. Brokers may count calendar days or trading days slightly differently—check yours. You will see DTE on chains, filters, and the Wheel page when comparing contracts.In the money, at the money, out of the money
These labels describe the relationship between the stock price and the strike—not whether a trade is “good.”
ITM options usually cost more premium because they already have intrinsic value (the exercise would have immediate economic sense). OTM options are often cheaper but need a larger move to be worth exercising.
4. Opening and closing a position
You do not have to hold until expiration. Most traders open and close positions in the market.
Exercise is different from closing: the buyer uses their right to buy or sell the underlying at the strike. Many index and equity options are American-style (can be exercised before expiration in many cases), but most active traders still close in the market rather than exercise early. Rules depend on the contract—check your broker and the OCC materials.
5. What happens at expiration?
If an option is still open at expiration:- Long OTM options often expire worthless—the buyer loses the premium paid.
- Long ITM options may be exercised (automatic exercise rules vary—confirm with your broker).
- Short options may be assigned if the buyer exercises or if automatic exercise applies.
6. Assignment (critical for the wheel)
Assignment is when the option seller must fulfill the obligation—typically 100 shares per contract for standard U.S. equity options.
The wheel strategy uses assignment on purpose (cash-secured puts and covered calls). That only works if you:
- Chose a strike you are willing to own or sell at
- Sized the position within your account limits
- Understand you may get shares even when the timing is inconvenient
7. A few habits that help every beginner
- Read the contract—ticker, date, strike, call vs put, and whether you are long or short
- Know your max risk before you open; selling options is not “free money”
- Use a paper trading account or small size until assignment and closing feel familiar
- Confirm live prices at your broker—chart prices on research sites (including BigDipperOptions) are delayed
Checkpoint
- I can explain call vs put in one sentence
- I know 1 contract ≈ 100 shares for standard U.S. stock options
- I can name buyer vs seller and who pays premium
- I understand ITM / OTM in plain language
- I know assignment can happen when I sell options
- I read the data delay note