Basics
An option is a contract that gives the owner the right, but not the obligation, to buy or sell a stock at a set price by a set date.
An option is a piece of paper that allows you if you own the contract to buy or sell a stock at a set price before the contract expires, or to buy or sell the contract at any time prior to expiration..
ctrct=contract
a Purchased Call option gives you the right to buy a stock a t a set price for a set period of time.
A Purchased Put option gives you the right to SELL a stock at a certain price by a set date.
Option carry the risk of total loss of your investment.
Options have leverage. When you buy 1 contract, you control 100 shares of the stock at a fraction of the price
5 Ingredients to Option Pricing
The current stock price.
The strike price you are trading.
The time till the option expires.
The cost of the money.
The stocks volatility.
Every Option has 2 Parts
Intrinsic vale
Value if the current value of the opt if it were to be exercised today.
Time value
Value if the amount you pay to exercise your contract within the next few months.
Time Value(TV) is the additional amount the MM's add to the premium, it's like a car dealers mark up price.
Example
a. Intrinsic value + Time value = option price
b. Stock=$26
c. I want to buy the $25 calls
d. The intrinsic value = $1 (26-25)
e. If the option quote price of the $25 call is 2.50, then the time value is $1.50 (see F)
f. 2.50-1.00=1.50
g. If stock is $27, Intrinsic Value=$2.00
h. Option Quote - Intrinsic Value = Time Value

Theoretical Value
1. Is the fair value of an option.
2. It not only tells us if the stock is overvalued or undervalued, but it also tells us exactly what price we should be paying for an option.
3. This T-value is derived from the BSC.
Example
a. Lets say we are looking at a 60.00 stock and the Tval is listed at .65.
b. Ask price for the strike price and the exp month is .70 for the Nov 60.00 call option.
c. If we pay .70 to buy the option and the Tval is .65 we will pay 7.6% more than we should.
d. There is a normal premium built into most options as the MM's will try to see how much more you are willing to pay.
e. As a general rule of thumb, make sure the ask price of an option is not trading more than 20% premium of the T-Val.