Overvalued

Overvalued describes a security whose current market price is higher than some estimate of what it is actually worth. That estimate of "worth" doesn't come from nowhere — it comes from a valuation method, and the word only means something once you know which method is being used.

For stocks, "worth" is often estimated using things like earnings, growth expectations, or comparisons to similar companies (for example, a price-to-earnings ratio far above that of peers might lead someone to call a stock overvalued). For options specifically, "worth" usually means fair value — the theoretical price produced by an options pricing model (such as Black-Scholes) using inputs like the stock price, time to expiration, interest rates, and volatility. If the option's actual market price is higher than what the model says it should be, traders call it overvalued.

The nuance that trips people up: overvalued is always relative to a model or a benchmark, not an absolute truth. A model can be overvalued itself — for instance, it might be using an outdated volatility estimate, so what looks like an overpriced option is really just the model being wrong. Overvalued also doesn't mean "about to fall." A security can stay overvalued by any measure for a long time if demand keeps supporting the price; the label describes a price relationship, not a prediction.

It's also worth separating overvalued from simply "expensive." A $500 stock isn't overvalued just because the number is large — it's overvalued (by some standard) if its price is high relative to what that standard says it should be worth, regardless of the dollar figure.