Options

What is Options? — Definition

A call option gives the holder the right to buy 100 shares of a stock at the strike price before expiration. A put option gives the right to sell. Options are priced based on the underlying stock price, strike price, time to expiration, volatility, and interest rates. The buyer pays a premium upfront; the seller collects it.

Options can be used for hedging (protecting an existing position), income generation (selling covered calls), or speculation (buying calls or puts for leverage). The leverage is extreme: a 10% move in a stock can translate to a 100–300% gain or total loss of the option premium.

Example

In early 2023, a trader bought call options on Nvidia with a $200 strike price expiring in December 2023. Nvidia stock ran from $200 to $490. The options that cost $10 per contract might have risen to $300 — a 2,900% gain, versus the stock's 145% gain.

The put/call options ratio is one of the signals included in BMInsider's Fear & Greed Index — extreme put buying (protective hedging) signals fear, while extreme call buying signals euphoria.