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Options · US Markets
Options, explained
Learn what options are, how they work, and how to read the basic terms in market coverage.
What an option contract is
An option is a contract that gives its buyer the right, but not the obligation, to buy or sell something by a certain date. In markets, that something is usually a stock or an index tied to a group of stocks.
Options are standardized contracts traded on exchanges, so the key terms are set in advance. Those terms include the strike price, the expiration date, and whether the contract is a call or a put.
Why calls and puts mean opposite things
A call option gives the buyer the right to buy the underlying asset at the strike price. People usually think of calls as a way to express a view that the asset may rise above that strike before expiration.
A put option gives the buyer the right to sell the underlying asset at the strike price. People usually think of puts as a way to express a view that the asset may fall below that strike before expiration, or as a way to help offset a position they already own.
How the strike price and expiration date shape the contract
The strike price is the price level built into the contract. For a call, the strike is the price the buyer can pay if they choose to exercise. For a put, it is the price the buyer can receive if they choose to exercise.
The expiration date is the last day the option can be used. More time until expiration usually gives the contract more opportunity to move into a profitable range, but it also usually makes the contract more expensive.
Why options have a premium
The premium is the price paid to buy the option. It is quoted per share, but each listed contract usually represents 100 shares, so the dollar cost is often multiplied by 100.
That premium reflects several things, including how much time is left, how far the strike is from the current market price, and how much the underlying asset has tended to move in the past. Market coverage often refers to this mix of factors as an option’s value or price.
How options can expire worthless
An option only has value if using it makes sense relative to the market price near expiration. If a call’s strike is above the market price at expiration, or a put’s strike is below it, the contract may expire without being exercised.
That is one reason options can be risky for buyers. The premium paid up front can be lost entirely if the market does not move enough, or does not move in the expected direction, before expiration.
How writers and buyers use options differently
The buyer of an option pays the premium and gets the right to act, but not the obligation. The writer, also called the seller, receives the premium and takes on the obligation to deliver or buy the shares if the contract is exercised.
That difference matters because the seller’s potential obligations can be larger than the upfront premium collected. For that reason, selling options is often discussed as involving different and sometimes greater risks than simply buying them.
How options can be used to hedge or speculate
A hedge is a position meant to help offset another position. For example, someone who owns a stock may use a put option to create a form of downside protection, though the protection is not perfect and it costs money.
Options are also used to speculate, which means trying to profit from a move in price, volatility, or time. Coverage about options flow, volume, or unusual activity is often pointing to speculation, hedging, or both, but the headline data alone may not reveal the full reason.
Common questions
What does it mean when an option is in the money?
An option is in the money when exercising it would have intrinsic value based on the current market price. A call is in the money when the market price is above the strike, and a put is in the money when the market price is below the strike. That does not mean the trade was profitable overall, because the premium paid still matters.
What does option volume mean in market coverage?
Volume is the number of contracts traded during a given period, usually a day. High volume can mean a contract is attracting attention, but it does not by itself show whether traders are bullish, bearish, hedging, or closing old positions.
What is open interest?
Open interest is the number of option contracts that are still open, meaning they have not been closed out, exercised, or allowed to expire. It helps show how much contract activity is sitting in the market, but it is not the same as daily trading volume.
Why do option prices change even if the stock barely moves?
Option prices are affected by time, expected volatility, and the relationship between the strike and the underlying price. That means an option can gain or lose value even when the stock moves little, especially as expiration gets closer.
Do options always involve stocks?
No. In the US, options can also be written on indexes, exchange-traded funds, futures, and other instruments, depending on the market and product. The basic ideas are the same, but the contract details can vary by exchange and product type.