Options

An equity option is a contract between a buyer and seller. A call option gives the buyer the right to purchase 100 shares at the strike price before expiry; a put option gives the right to sell. The buyer pays a premium for this right; the seller (writer) receives the premium and takes on the obligation to deliver if exercised. Options can be exercised before expiry (American style, standard for US equity options) or only at expiry (European style, standard for index options).

Options pricing is driven by intrinsic value (the difference between current price and strike, if in-the-money) and time value (the probability that the option will expire in-the-money, driven by time to expiry and implied volatility). The Black-Scholes model and its variants formalise this pricing. The Greeks - delta (price sensitivity to underlying moves), gamma (rate of change of delta), theta (time decay), and vega (sensitivity to implied volatility) - are essential tools for options traders managing portfolios of positions.

Retail traders use options for hedging (buying puts to protect a long stock position), income generation (selling covered calls or cash-secured puts), and leveraged directional speculation (buying calls or puts for a fraction of the cost of owning shares). The risk profile differs fundamentally from stocks: option buyers have capped downside (premium paid) and leveraged upside; option sellers face theoretically unlimited losses (for naked calls) or substantial drawdowns (for short puts) in exchange for the premium collected.