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Chapter 1
OptiOn Fundamentals
This chapter introduces what an option is and how to visualize options in 
an intelligent way while hinting at the great flexibility and power a sensible 
use of options gives an investor. It is split into three sections:
1. Option Overview: Characteristics, everyday options, and a brief 
option history.
2. Option Directionality: An investigation of similarities and differ -
ences between stocks and options. This section also contains an 
introduction to the unique way that this book visualizes options 
and to the inescapable jargon used in the options world and a bit 
of intelligent option investor–specific jargon as well.
3. Option Flexibility: An explanation of why options are much more 
investor-friendly than stocks, as well as examples of the handful of 
strategies an intelligent option investor uses most often.
Even those of you who know something about options should at the 
very least read the last section. Y ou will find that the intelligent option 
investor makes very close to zero use of the typical hockey-stick diagrams 
shown in other books. Instead, this book uses the concept of a range of 
exposure. The rest of the book—discussing option pricing, corporate 
valuation, and option strategies—builds on this range-of-exposure concept, 
so skipping it is likely to lead to confusion later.
This chapter is an important first step in being an intelligent option 
investor. Someone who knows how options work does not qualify as be-
ing an intelligent option investor, but certainly, one cannot become an