---
id: "prereq-options-mechanics"
type: "prereq"
source_timestamps: ["Reel 29", "Reel 34"]
tags: ["options"]
related: ["concept-covered-calls-as-interest", "concept-options-as-debt", "action-sell-covered-calls"]
reason: "Required to execute yield-generation and leverage strategies without taking on undefined risk."
---
# Basic Options Mechanics

## Prerequisite

Foundational understanding of options terminology and behavior:

- **Strike price** — the contractual exercise price.
- **Premium** — the upfront price paid for the option.
- **Expiration date** — when the contract expires worthless or is exercised.
- **Time decay (theta)** — the daily erosion of extrinsic value as expiration approaches.
- **Intrinsic vs. extrinsic value** — the in-the-money component vs. time/volatility value.
- **Assignment** — what happens when a short option is exercised against you.
- **LEAPS** — Long-term Equity Anticipation Securities (options with 1+ year to expiration).

## Why It's Required

Both [[concept-covered-calls-as-interest]] and [[concept-options-as-debt]] are non-trivial strategies. Without options mechanics, the investor risks **undefined exposure** — particularly on the short-call side (assignment risk) and the long-LEAPS side (theta and vol risk).

Actions [[action-sell-covered-calls]] depend on this foundation.

## Suggested Resources

John Hull's *Options, Futures, and Other Derivatives*. CBOE Options Institute educational materials. The free Options Industry Council (OIC) courses.