Equity Options

An equity option is a contract that gives its buyer the right, but not the obligation, to buy or sell shares of a specific company's stock at a set price before a set expiration date. The company's stock is called the "underlying" because the option's value is derived from it.

Each standard equity option contract typically represents 100 shares of the underlying stock, though this can change after stock splits or other corporate actions. A "call" option gives the buyer the right to buy those shares at the agreed price (called the strike price), while a "put" option gives the buyer the right to sell at that price. The person who sells, or "writes," the option takes on the opposite obligation if the buyer chooses to exercise it.

The nuance that trips people up is the distinction between equity options and "non-equity options," which are options on things other than individual stocks, such as stock indexes (like the S&P 500), ETFs, or futures contracts. Equity options settle by delivering actual shares of stock when exercised, whereas many index options settle in cash instead. This affects how the option behaves near expiration and what actually happens if you hold it until then.

Equity options also carry company-specific risk that index options don't: an earnings surprise, a merger announcement, or a dividend can move a single stock sharply, which moves the option's value along with it, sometimes far more dramatically in percentage terms than the stock itself.