Founders: Session 1 — Option Mechanics: End State & Student Outline

(Ch. 1–2, Option Volatility and Pricing)

Housekeeping: See you at 2pm. Link at bottom with materials including full Natenberg text. The recording from this will be made available to Founders Monday

Session 1 — Option Mechanics: End State & Student Outline

(Ch. 1–2, Option Volatility and Pricing)

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End State

By the end of this session, students will be able to:

• Identify a call and a put instantly

• Classify any option as ITM, ATM, or OTM

• Separate intrinsic value from time value

• Draw basic payoff diagrams (long/short call, long/short put)

• Compare stock versus option exposure (linear versus nonlinear)

This session establishes the mechanical base required for all subsequent work.

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Student Outline

A. Definitions

• Call: right to buy

• Put: right to sell

• Strike: fixed transaction price

• Expiration: finite life of the contract

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B. Payoff Structures

• Long Call

• Short Call

• Long Put

• Short Put

Each position must be understood visually through payoff diagrams.

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C. Value Components

• Intrinsic Value: immediate exercise value

• Time Value: option premium minus intrinsic value

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D. Moneyness

• In-the-Money (ITM)

• At-the-Money (ATM)

• Out-of-the-Money (OTM)

Classification must be immediate and accurate.

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E. Exposure Comparison

• Stock: linear payoff

• Option: nonlinear payoff

Understanding this difference is required before introducing risk measures or volatility.