Options
Options are contracts that give the buyer the right, but not the obligation, to buy (call) or sell (put) a stock at a set price (strike) on or before a set date (expiration).
Calls and puts
- Call — the right to buy at the strike. It gains value when the stock rises above it.
- Put — the right to sell at the strike. It gains value when the stock falls below it.
The buyer pays a price up front, the premium. The seller keeps the premium and takes on the obligation. One U.S. stock option contract covers 100 shares.
Insurance for a portfolio
An investor who owns a stock can buy a put to cap the loss if it falls — much like an insurance policy with a deductible. The more a big move is feared, the more that protection costs; that price of fear is implied volatility.
Open interest
Open interest is the number of contracts still open at each strike and expiration. It is published once a day by OPRA. Market makers hold the other side of many of them and hedge by trading the stock — which is why open options can move the price. Mellow adds that up as gamma exposure.