An equity option gives the buyer the right, but not the obligation, to buy or sell a share or index at a specific price — the 'strike price' — on or before a specific date. The buyer pays a premium for this right. Options are one of the most versatile financial instruments: they can protect a portfolio against loss, enhance income, express a view on volatility, or create bespoke payoff profiles.
Calls and puts
A call option gives the right to buy shares at the strike price. If the underlying rises above the strike, the call becomes valuable — the holder can buy at the lower strike price. If the underlying stays below the strike, the option expires worthless and the buyer loses only the premium paid.
A put option gives the right to sell shares at the strike price. If the underlying falls below the strike, the put gains value — the holder can sell at the higher strike while the market is trading lower. If the underlying stays above the strike, the put expires worthless.
European vs American options
A European option can only be exercised at expiry. An American option can be exercised at any time before expiry. Most equity index options are European; single-stock options are often American. The right to early exercise has value — particularly for deep in-the-money calls on dividend-paying stocks.
OTC vs exchange-traded equity options
Listed equity options trade on exchanges (CBOE, Eurex) with standardised strikes and expiry dates, complete price transparency, and central clearing. OTC equity options can be structured with any strike, expiry, or reference asset — essential for bespoke hedging needs but requiring bilateral ISDA documentation and margin management.
Managing option risk: the Greeks
Options are managed using the Greeks: Delta (sensitivity to the underlying price), Gamma (rate of change of delta as the underlying moves), Vega (sensitivity to implied volatility), and Theta (daily time decay). A large options book requires continuous delta rebalancing — and understanding how each Greek accumulates and interacts is the practical art of options risk management.
How options are priced in practice, how the volatility surface shapes option values across strikes and maturities, and how banks structure and hedge bespoke option solutions for institutional clients are explored in Market Mechanics — the complete plain-English guide to how a bank's markets business works.