The Probability Game
What if everything you thought about options was slightly wrong?
Most people think options are bets on whether a stock goes up or down. They're not. They're something far more interesting.
The Betting Game
Let's play a simple game to discover something profound about how you think about risk.
You have $100. I'll flip a fair coin.
Choose which game you'd rather play:
The Uncertainty Machine
Before we talk about options, let's see how stock prices actually move.
The Insurance Insight
You already understand options. You just don't know it yet.
Car Insurance
Is that $1,200 "wasted" if you don't crash?
No — you paid for protection. Peace of mind has value.
Stock "Insurance" (Put Option)
A PUT option is literally insurance on your stock.
Premium = cost of protection. Strike = your guaranteed floor.
💡 The Insight
A PUT gives you the right to sell at a set price. It protects against drops.
A CALL gives you the right to buy at a set price. It lets you profit from rises.
Both are just insurance policies — one protects against bad things, one lets you participate in good things.
The Payoff Playground
Now for the fun part. Let's build option payoffs and see exactly what happens.
Build Your Option
🔍 Things to Discover
The Two Sides
Every option trade has a buyer and a seller. Their payoffs are mirror images.
The Buyer
The Seller
🎲 Why Would Anyone Sell Options?
The same reason casinos exist: probability is on their side.
Options expire worthless about 70-80% of the time. Sellers collect premium over and over. Occasionally they have a big loss, but on average, they come out ahead.
This is the fundamental tension of options: Buyers pay for insurance. Sellers get paid to provide it.
What Are You Really Paying For?
An option's price has two components. Understanding them is crucial.
💰 Intrinsic Value
What the option is worth right now if exercised immediately.
For a call: Stock Price − Strike Price (min 0)
Stock at $103, Strike at $100 → Intrinsic = $3
⏳ Extrinsic Value (Time Value)
What you pay for the possibility of future movement.
Premium − Intrinsic Value
This is pure hope + time + uncertainty. It decays to zero at expiration.
🔬 Experiment
Slide "Days to Expiration" to 0. What happens to extrinsic value?
Chapter 1 Complete
Let's lock in what you've learned.
🎯 Key Insights
Options are probability instruments
You're not just betting on direction — you're betting on the probability and magnitude of price moves.
Asymmetric payoffs are the superpower
Limited loss, potentially unlimited gain. This is what you're paying the premium for.
Every trade has two sides
Buyers pay for insurance/opportunity. Sellers get paid to take on risk.
Time has value — and it decays
Extrinsic value melts away as expiration approaches. This is crucial for strategy selection.