Options Click

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Adding options to commands can be accomplished by the option() decorator. Since options can come in various different versions, there are a ton of parameters to configure their behavior. Options in click are distinct from positional arguments .

Name Your Options¶

Options have a name that will be used as the Python argument name when calling the decorated function. This can be inferred from the option names or given explicitly. Names are given as position arguments to the decorator.

A name is chosen in the following order

If a name is not prefixed, it is used as the Python argument name and not treated as an option name on the command line.

If there is at least one name prefixed with two dashes, the first one given is used as the name.

The first name prefixed with one dash is used otherwise.

To get the Python argument name, the chosen name is converted to lower case, up to two dashes are removed as the prefix, and other dashes are converted to underscores.

«-f», «–foo-bar» , the name is foo_bar

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«-x» , the name is x

«-f», «–filename», «dest» , the name is dest

«–CamelCase» , the name is camelcase

«-f», «-fb» , the name is f

«–f», «–foo-bar» , the name is f

«—f» , the name is _f

Basic Value Options¶

The most basic option is a value option. These options accept one argument which is a value. If no type is provided, the type of the default value is used. If no default value is provided, the type is assumed to be STRING . Unless a name is explicitly specified, the name of the parameter is the first long option defined; otherwise the first short one is used. By default, options are not required, however to make an option required, simply pass in required=True as an argument to the decorator.

And on the command line:

In this case the option is of type INT because the default value is an integer.

To show the default values when showing command help, use show_default=True

Multi Value Options¶

Sometimes, you have options that take more than one argument. For options, only a fixed number of arguments is supported. This can be configured by the nargs parameter. The values are then stored as a tuple.

And on the command line:

Tuples as Multi Value Options¶

New in version 4.0.

As you can see that by using nargs set to a specific number each item in the resulting tuple is of the same type. This might not be what you want. Commonly you might want to use different types for different indexes in the tuple. For this you can directly specify a tuple as type:

And on the command line:

By using a tuple literal as type, nargs gets automatically set to the length of the tuple and the click.Tuple type is automatically used. The above example is thus equivalent to this:

Multiple Options¶

Similarly to nargs , there is also the case of wanting to support a parameter being provided multiple times and have all the values recorded – not just the last one. For instance, git commit -m foo -m bar would record two lines for the commit message: foo and bar . This can be accomplished with the multiple flag:

And on the command line:

When passing a default with multiple=True , the default value must be a list or tuple, otherwise it will be interpreted as a list of single characters.


In some very rare circumstances, it is interesting to use the repetition of options to count an integer up. This can be used for verbosity flags, for instance:

And on the command line:

Boolean Flags¶

Boolean flags are options that can be enabled or disabled. This can be accomplished by defining two flags in one go separated by a slash ( / ) for enabling or disabling the option. (If a slash is in an option string, Click automatically knows that it’s a boolean flag and will pass is_flag=True implicitly.) Click always wants you to provide an enable and disable flag so that you can change the default later.

And on the command line:

If you really don’t want an off-switch, you can just define one and manually inform Click that something is a flag:

And on the command line:

Note that if a slash is contained in your option already (for instance, if you use Windows-style parameters where / is the prefix character), you can alternatively split the parameters through ; instead:

Changed in version 6.0.

If you want to define an alias for the second option only, then you will need to use leading whitespace to disambiguate the format string:

Feature Switches¶

In addition to boolean flags, there are also feature switches. These are implemented by setting multiple options to the same parameter name and defining a flag value. Note that by providing the flag_value parameter, Click will implicitly set is_flag=True .

To set a default flag, assign a value of True to the flag that should be the default.

And on the command line:

Choice Options¶

Sometimes, you want to have a parameter be a choice of a list of values. In that case you can use Choice type. It can be instantiated with a list of valid values. The originally passed choice will be returned, not the str passed on the command line. Token normalization functions and case_sensitive=False can cause the two to be different but still match.

What it looks like:

Only pass the choices as list or tuple. Other iterables (like generators) may lead to unexpected results.

Choices work with options that have multiple=True . If a default value is given with multiple=True , it should be a list or tuple of valid choices.

Choices should be unique after considering the effects of case_sensitive and any specified token normalization function.

Changed in version 7.1: The resulting value from an option will always be one of the originally passed choices regardless of case_sensitive .


In some cases, you want parameters that can be provided from the command line, but if not provided, ask for user input instead. This can be implemented with Click by defining a prompt string.

And what it looks like:

If you are not happy with the default prompt string, you can ask for a different one:

What it looks like:

It is advised that prompt not be used in conjunction with the multiple flag set to True. Instead, prompt in the function interactively.

Password Prompts¶

Click also supports hidden prompts and asking for confirmation. This is useful for password input:

What it looks like:

Because this combination of parameters is quite common, this can also be replaced with the password_option() decorator:

Dynamic Defaults for Prompts¶

The auto_envvar_prefix and default_map options for the context allow the program to read option values from the environment or a configuration file. However, this overrides the prompting mechanism, so that the user does not get the option to change the value interactively.

If you want to let the user configure the default value, but still be prompted if the option isn’t specified on the command line, you can do so by supplying a callable as the default value. For example, to get a default from the environment:

To describe what the default value will be, set it in show_default .

Callbacks and Eager Options¶

Sometimes, you want a parameter to completely change the execution flow. For instance, this is the case when you want to have a –version parameter that prints out the version and then exits the application.

Note: an actual implementation of a –version parameter that is reusable is available in Click as click.version_option() . The code here is merely an example of how to implement such a flag.

In such cases, you need two concepts: eager parameters and a callback. An eager parameter is a parameter that is handled before others, and a callback is what executes after the parameter is handled. The eagerness is necessary so that an earlier required parameter does not produce an error message. For instance, if –version was not eager and a parameter –foo was required and defined before, you would need to specify it for –version to work. For more information, see Callback Evaluation Order .

A callback is a function that is invoked with two parameters: the current Context and the value. The context provides some useful features such as quitting the application and gives access to other already processed parameters.

Here an example for a –version flag:

The expose_value parameter prevents the pretty pointless version parameter from being passed to the callback. If that was not specified, a boolean would be passed to the hello script. The resilient_parsing flag is applied to the context if Click wants to parse the command line without any destructive behavior that would change the execution flow. In this case, because we would exit the program, we instead do nothing.

What it looks like:

Callback Signature Changes

In Click 2.0 the signature for callbacks changed. For more information about these changes see Upgrading to 2.0 .

Yes Parameters¶

For dangerous operations, it’s very useful to be able to ask a user for confirmation. This can be done by adding a boolean –yes flag and asking for confirmation if the user did not provide it and to fail in a callback:

And what it looks like on the command line:

Because this combination of parameters is quite common, this can also be replaced with the confirmation_option() decorator:

Callback Signature Changes

In Click 2.0 the signature for callbacks changed. For more information about these changes see Upgrading to 2.0 .

Values from Environment Variables¶

A very useful feature of Click is the ability to accept parameters from environment variables in addition to regular parameters. This allows tools to be automated much easier. For instance, you might want to pass a configuration file with a –config parameter but also support exporting a TOOL_CONFIG=hello.cfg key-value pair for a nicer development experience.

This is supported by Click in two ways. One is to automatically build environment variables which is supported for options only. To enable this feature, the auto_envvar_prefix parameter needs to be passed to the script that is invoked. Each command and parameter is then added as an uppercase underscore-separated variable. If you have a subcommand called run taking an option called reload and the prefix is WEB , then the variable is WEB_RUN_RELOAD .

And from the command line:

When using auto_envvar_prefix with command groups, the command name needs to be included in the environment variable, between the prefix and the parameter name, i.e. PREFIX_COMMAND_VARIABLE . If you have a subcommand called run-server taking an option called host and the prefix is WEB , then the variable is WEB_RUN_SERVER_HOST .

The second option is to manually pull values in from specific environment variables by defining the name of the environment variable on the option.

And from the command line:

In that case it can also be a list of different environment variables where the first one is picked.

Multiple Values from Environment Values¶

As options can accept multiple values, pulling in such values from environment variables (which are strings) is a bit more complex. The way Click solves this is by leaving it up to the type to customize this behavior. For both multiple and nargs with values other than 1 , Click will invoke the ParamType.split_envvar_value() method to perform the splitting.

The default implementation for all types is to split on whitespace. The exceptions to this rule are the File and Path types which both split according to the operating system’s path splitting rules. On Unix systems like Linux and OS X, the splitting happens for those on every colon ( : ), and for Windows, on every semicolon ( ; ).

And from the command line:

Other Prefix Characters¶

Click can deal with alternative prefix characters other than – for options. This is for instance useful if you want to handle slashes as parameters / or something similar. Note that this is strongly discouraged in general because Click wants developers to stay close to POSIX semantics. However in certain situations this can be useful:

And from the command line:

Note that if you are using / as prefix character and you want to use a boolean flag you need to separate it with ; instead of / :

Range Options¶

A special mention should go to the IntRange type, which works very similarly to the INT type, but restricts the value to fall into a specific range (inclusive on both edges). It has two modes:

the default mode (non-clamping mode) where a value that falls outside of the range will cause an error.

an optional clamping mode where a value that falls outside of the range will be clamped. This means that a range of 0-5 would return 5 for the value 10 or 0 for the value -1 (for example).

And from the command line:

If you pass None for any of the edges, it means that the range is open at that side.

Callbacks for Validation¶

Changed in version 2.0.

If you want to apply custom validation logic, you can do this in the parameter callbacks. These callbacks can both modify values as well as raise errors if the validation does not work.

In Click 1.0, you can only raise the UsageError but starting with Click 2.0, you can also raise the BadParameter error, which has the added advantage that it will automatically format the error message to also contain the parameter name.

Essential Options Trading Guide

Options trading may seem overwhelming at first, but it’s easy to understand if you know a few key points. Investor portfolios are usually constructed with several asset classes. These may be stocks, bonds, ETFs, and even mutual funds. Options are another asset class, and when used correctly, they offer many advantages that trading stocks and ETFs alone cannot.

Key Takeaways

  • An option is a contract giving the buyer the right, but not the obligation, to buy (in the case of a call) or sell (in the case of a put) the underlying asset at a specific price on or before a certain date.
  • People use options for income, to speculate, and to hedge risk.
  • Options are known as derivatives because they derive their value from an underlying asset.
  • A stock option contract typically represents 100 shares of the underlying stock, but options may be written on any sort of underlying asset from bonds to currencies to commodities.


What Are Options?

Options are contracts that give the bearer the right, but not the obligation, to either buy or sell an amount of some underlying asset at a pre-determined price at or before the contract expires.   Options can be purchased like most other asset classes with brokerage investment accounts. 

Options are powerful because they can enhance an individual’s portfolio. They do this through added income, protection, and even leverage. Depending on the situation, there is usually an option scenario appropriate for an investor’s goal. A popular example would be using options as an effective hedge against a declining stock market to limit downside losses. Options can also be used to generate recurring income. Additionally, they are often used for speculative purposes such as wagering on the direction of a stock. 

There is no free lunch with stocks and bonds. Options are no different. Options trading involves certain risks that the investor must be aware of before making a trade. This is why, when trading options with a broker, you usually see a disclaimer similar to the following:

Options involve risks and are not suitable for everyone. Options trading can be speculative in nature and carry substantial risk of loss.

Options as Derivatives

Options belong to the larger group of securities known as derivatives. A derivative’s price is dependent on or derived from the price of something else. As an example, wine is a derivative of grapes ketchup is a derivative of tomatoes, and a stock option is a derivative of a stock. Options are derivatives of financial securities—their value depends on the price of some other asset. Examples of derivatives include calls, puts, futures, forwards, swaps, and mortgage-backed securities, among others.

Call and Put Options

Options are a type of derivative security. An option is a derivative because its price is intrinsically linked to the price of something else. If you buy an options contract, it grants you the right, but not the obligation to buy or sell an underlying asset at a set price on or before a certain date.

A call option gives the holder the right to buy a stock and a put option gives the holder the right to sell a stock. Think of a call option as a down-payment for a future purpose. 

Call Option Example

A potential homeowner sees a new development going up. That person may want the right to purchase a home in the future, but will only want to exercise that right once certain developments around the area are built.

The potential home buyer would benefit from the option of buying or not. Imagine they can buy a call option from the developer to buy the home at say $400,000 at any point in the next three years. Well, they can—you know it as a non-refundable deposit. Naturally, the developer wouldn’t grant such an option for free. The potential home buyer needs to contribute a down-payment to lock in that right.

With respect to an option, this cost is known as the premium. It is the price of the option contract. In our home example, the deposit might be $20,000 that the buyer pays the developer. Let’s say two years have passed, and now the developments are built and zoning has been approved. The home buyer exercises the option and buys the home for $400,000 because that is the contract purchased.

The market value of that home may have doubled to $800,000. But because the down payment locked in a pre-determined price, the buyer pays $400,000. Now, in an alternate scenario, say the zoning approval doesn’t come through until year four. This is one year past the expiration of this option. Now the home buyer must pay the market price because the contract has expired. In either case, the developer keeps the original $20,000 collected.

Call Option Basics

Put Option Example

Now, think of a put option as an insurance policy. If you own your home, you are likely familiar with purchasing homeowner’s insurance. A homeowner buys a homeowner’s policy to protect their home from damage. They pay an amount called the premium, for some amount of time, let’s say a year. The policy has a face value and gives the insurance holder protection in the event the home is damaged.

What if, instead of a home, your asset was a stock or index investment? Similarly, if an investor wants insurance on his/her S&P 500 index portfolio, they can purchase put options. An investor may fear that a bear market is near and may be unwilling to lose more than 10% of their long position in the S&P 500 index. If the S&P 500 is currently trading at $2500, he/she can purchase a put option giving the right to sell the index at $2250, for example, at any point in the next two years.

If in six months the market crashes by 20% (500 points on the index), he or she has made 250 points by being able to sell the index at $2250 when it is trading at $2000—a combined loss of just 10%. In fact, even if the market drops to zero, the loss would only be 10% if this put option is held. Again, purchasing the option will carry a cost (the premium), and if the market doesn’t drop during that period, the maximum loss on the option is just the premium spent.

Put Option Basics

Buying, Selling Calls/Puts

There are four things you can do with options:

  1. Buy calls
  2. Sell calls
  3. Buy puts
  4. Sell puts

Buying stock gives you a long position. Buying a call option gives you a potential long position in the underlying stock. Short-selling a stock gives you a short position. Selling a naked or uncovered call gives you a potential short position in the underlying stock.

Buying a put option gives you a potential short position in the underlying stock. Selling a naked, or unmarried, put gives you a potential long position in the underlying stock. Keeping these four scenarios straight is crucial.

People who buy options are called holders and those who sell options are called writers of options. Here is the important distinction between holders and writers:

  1. Call holders and put holders (buyers) are not obligated to buy or sell. They have the choice to exercise their rights. This limits the risk of buyers of options to only the premium spent.
  2. Call writers and put writers (sellers), however, are obligated to buy or sell if the option expires in-the-money (more on that below). This means that a seller may be required to make good on a promise to buy or sell. It also implies that option sellers have exposure to more, and in some cases, unlimited, risks. This means writers can lose much more than the price of the options premium.   

Why Use Options


Speculation is a wager on future price direction. A speculator might think the price of a stock will go up, perhaps based on fundamental analysis or technical analysis. A speculator might buy the stock or buy a call option on the stock. Speculating with a call option—instead of buying the stock outright—is attractive to some traders since options provide leverage. An out-of-the-money call option may only cost a few dollars or even cents compared to the full price of a $100 stock.


Options were really invented for hedging purposes. Hedging with options is meant to reduce risk at a reasonable cost. Here, we can think of using options like an insurance policy. Just as you insure your house or car, options can be used to insure your investments against a downturn.

Imagine that you want to buy technology stocks. But you also want to limit losses. By using put options, you could limit your downside risk and enjoy all the upside in a cost-effective way. For short sellers, call options can be used to limit losses if wrong—especially during a short squeeze.

How Options Work

In terms of valuing option contracts, it is essentially all about determining the probabilities of future price events. The more likely something is to occur, the more expensive an option would be that profits from that event. For instance, a call value goes up as the stock (underlying) goes up. This is the key to understanding the relative value of options.

The less time there is until expiry, the less value an option will have. This is because the chances of a price move in the underlying stock diminish as we draw closer to expiry. This is why an option is a wasting asset. If you buy a one-month option that is out of the money, and the stock doesn’t move, the option becomes less valuable with each passing day. Since time is a component to the price of an option, a one-month option is going to be less valuable than a three-month option. This is because with more time available, the probability of a price move in your favor increases, and vice versa.

Accordingly, the same option strike that expires in a year will cost more than the same strike for one month. This wasting feature of options is a result of time decay. The same option will be worth less tomorrow than it is today if the price of the stock doesn’t move. 

Volatility also increases the price of an option. This is because uncertainty pushes the odds of an outcome higher. If the volatility of the underlying asset increases, larger price swings increase the possibilities of substantial moves both up and down. Greater price swings will increase the chances of an event occurring. Therefore, the greater the volatility, the greater the price of the option. Options trading and volatility are intrinsically linked to each other in this way. 

On most U.S. exchanges, a stock option contract is the option to buy or sell 100 shares; that’s why you must multiply the contract premium by 100 to get the total amount you’ll have to spend to buy the call.

What happened to our option investment
May 1 May 21 Expiry Date
Stock Price $67 $78 $62
Option Price $3.15 $8.25 worthless
Contract Value $315 $825 $0
Paper Gain/Loss $0 $510 -$315

The majority of the time, holders choose to take their profits by trading out (closing out) their position. This means that option holders sell their options in the market, and writers buy their positions back to close. Only about 10% of options are exercised, 60% are traded (closed) out, and 30% expire worthlessly.

Fluctuations in option prices can be explained by intrinsic value and extrinsic value, which is also known as time value. An option’s premium is the combination of its intrinsic value and time value. Intrinsic value is the in-the-money amount of an options contract, which, for a call option, is the amount above the strike price that the stock is trading. Time value represents the added value an investor has to pay for an option above the intrinsic value.   This is the extrinsic value or time value. So, the price of the option in our example can be thought of as the following:

Premium = Intrinsic Value + Time Value
$8.25 $8.00 $0.25

In real life, options almost always trade at some level above their intrinsic value, because the probability of an event occurring is never absolutely zero, even if it is highly unlikely.

Types of Options

American and European Options

American options can be exercised at any time between the date of purchase and the expiration date. European options are different from American options in that they can only be exercised at the end of their lives on their expiration date. The distinction between American and European options has nothing to do with geography, only with early exercise. Many options on stock indexes are of the European type.   Because the right to exercise early has some value, an American option typically carries a higher premium than an otherwise identical European option. This is because the early exercise feature is desirable and commands a premium.

There are also exotic options, which are exotic because there might be a variation on the payoff profiles from the plain vanilla options. Or they can become totally different products all together with «optionality» embedded in them. For example, binary options have a simple payoff structure that is determined if the payoff event happens regardless of the degree. Other types of exotic options include knock-out, knock-in, barrier options, lookback options, Asian options, and Bermudan options.   Again, exotic options are typically for professional derivatives traders.

Options Expiration & Liquidity

Options can also be categorized by their duration. Short-term options are those that expire generally within a year. Long-term options with expirations greater than a year are classified as long-term equity anticipation securities or LEAPs. LEAPS are identical to regular options, they just have longer durations.

Options can also be distinguished by when their expiration date falls. Sets of options now expire weekly on each Friday, at the end of the month, or even on a daily basis. Index and ETF options also sometimes offer quarterly expiries. 

Reading Options Tables

More and more traders are finding option data through online sources. (For related reading, see «Best Online Stock Brokers for Options Trading 2020») While each source has its own format for presenting the data, the key components generally include the following variables:

  • Volume (VLM) simply tells you how many contracts of a particular option were traded during the latest session.
  • The «bid» price is the latest price level at which a market participant wishes to buy a particular option.
  • The «ask» price is the latest price offered by a market participant to sell a particular option.
  • Implied Bid Volatility (IMPL BID VOL) can be thought of as the future uncertainty of price direction and speed. This value is calculated by an option-pricing model such as the Black-Scholes model and represents the level of expected future volatility based on the current price of the option.
  • Open Interest (OPTN OP) number indicates the total number of contracts of a particular option that have been opened. Open interest decreases as open trades are closed.
  • Delta can be thought of as a probability. For instance, a 30-delta option has roughly a 30% chance of expiring in-the-money.
  • Gamma (GMM) is the speed the option is moving in or out-of-the-money. Gamma can also be thought of as the movement of the delta.
  • Vega is a Greek value that indicates the amount by which the price of the option would be expected to change based on a one-point change in implied volatility.
  • Theta is the Greek value that indicates how much value an option will lose with the passage of one day’s time.
  • The «strike price» is the price at which the buyer of the option can buy or sell the underlying security if he/she chooses to exercise the option. 

Buying at the bid and selling at the ask is how market makers make their living.

Long Calls/Puts

The simplest options position is a long call (or put) by itself. This position profits if the price of the underlying rises (falls), and your downside is limited to loss of the option premium spent. If you simultaneously buy a call and put option with the same strike and expiration, you’ve created a straddle.

This position pays off if the underlying price rises or falls dramatically; however, if the price remains relatively stable, you lose premium on both the call and the put. You would enter this strategy if you expect a large move in the stock but are not sure which direction.   

Basically, you need the stock to have a move outside of a range. A similar strategy betting on an outsized move in the securities when you expect high volatility (uncertainty) is to buy a call and buy a put with different strikes and the same expiration—known as a strangle. A strangle requires larger price moves in either direction to profit but is also less expensive than a straddle. On the other hand, being short either a straddle or a strangle (selling both options) would profit from a market that doesn’t move much.   

Below is an explanation of straddles from my Options for Beginners course:

Straddles Academy

And here’s a description of strangles:

How to use Straddle Strategies

Spreads & Combinations

Spreads use two or more options positions of the same class. They combine having a market opinion (speculation) with limiting losses (hedging). Spreads often limit potential upside as well. Yet these strategies can still be desirable since they usually cost less when compared to a single options leg. Vertical spreads involve selling one option to buy another. Generally, the second option is the same type and same expiration, but a different strike.

A bull call spread, or bull call vertical spread, is created by buying a call and simultaneously selling another call with a higher strike price and the same expiration. The spread is profitable if the underlying asset increases in price, but the upside is limited due to the short call strike. The benefit, however, is that selling the higher strike call reduces the cost of buying the lower one.   Similarly, a bear put spread, or bear put vertical spread, involves buying a put and selling a second put with a lower strike and the same expiration. If you buy and sell options with different expirations, it is known as a calendar spread or time spread. 


Combinations are trades constructed with both a call and a put. There is a special type of combination known as a “synthetic.” The point of a synthetic is to create an options position that behaves like an underlying asset, but without actually controlling the asset. Why not just buy the stock? Maybe some legal or regulatory reason restricts you from owning it. But you may be allowed to create a synthetic position using options.   


A butterfly consists of options at three strikes, equally spaced apart, where all options are of the same type (either all calls or all puts) and have the same expiration. In a long butterfly, the middle strike option is sold and the outside strikes are bought in a ratio of 1:2:1 (buy one, sell two, buy one).

If this ratio does not hold, it is not a butterfly. The outside strikes are commonly referred to as the wings of the butterfly, and the inside strike as the body. The value of a butterfly can never fall below zero. Closely related to the butterfly is the condor – the difference is that the middle options are not at the same strike price. 

Options Risks

Because options prices can be modeled mathematically with a model such as the Black-Scholes, many of the risks associated with options can also be modeled and understood. This particular feature of options actually makes them arguably less risky than other asset classes, or at least allows the risks associated with options to be understood and evaluated. Individual risks have been assigned Greek letter names, and are sometimes referred to simply as «the Greeks.» 

Below is a very basic way to begin thinking about the concepts of Greeks:


What Is an Option?

Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futures, the holder is not required to buy or sell the asset if they choose not to.

  • Call options allow the holder to buy the asset at a stated price within a specific timeframe.
  • Put options allow the holder to sell the asset at a stated price within a specific timeframe.

Each option contract will have a specific expiration date by which the holder must exercise their option. The stated price on an option is known as the strike price. Options are typically bought and sold through online or retail brokers.

Key Takeaways

  • Options are financial derivatives that give buyers the right, but not the obligation, to buy or sell an underlying asset at an agreed-upon price and date.
  • Call options and put options form the basis for a wide range of option strategies designed for hedging, income, or speculation.
  • Although there are many opportunities to profit with options, investors should carefully weigh the risks.


How Options Work

Options are a versatile financial product. These contracts involve a buyer and a seller, where the buyer pays an options premium for the rights granted by the contract. Each call option has a bullish buyer and a bearish seller, while put options have a bearish buyer and a bullish seller.

Options contracts usually represent 100 shares of the underlying security, and the buyer will pay a premium fee for each contract. For example, if an option has a premium of 35 cents per contract, buying one option would cost $35 ($0.35 x 100 = $35). The premium is partially based on the strike price—the price for buying or selling the security until the expiration date. Another factor in the premium price is the expiration date. Just like with that carton of milk in the refrigerator, the expiration date indicates the day the option contract must be used. The underlying asset will determine the use-by date. For stocks, it is usually the third Friday of the contract’s month.

Traders and investors will buy and sell options for several reasons. Options speculation allows a trader to hold a leveraged position in an asset at a lower cost than buying shares of the asset. Investors will use options to hedge or reduce the risk exposure of their portfolio. In some cases, the option holder can generate income when they buy call options or become an options writer.

American options can be exercised any time before the expiration date of the option, while European options can only be exercised on the expiration date or the exercise date. Exercising means utilizing the right to buy or sell the underlying security.

Options Risk Metrics: The Greeks

The «Greeks» is a term used in the options market to describe the different dimensions of risk involved in taking an options position, either in a particular option or a portfolio of options. These variables are called Greeks because they are typically associated with Greek symbols. Each risk variable is a result of an imperfect assumption or relationship of the option with another underlying variable. Traders use different Greek values, such as delta, theta, and others, to assess options risk and manage option portfolios.


Delta (Δ) represents the rate of change between the option’s price and a $1 change in the underlying asset’s price. In other words, the price sensitivity of the option relative to the underlying. Delta of a call option has a range between zero and one, while the delta of a put option has a range between zero and negative one. For example, assume an investor is long a call option with a delta of 0.50. Therefore, if the underlying stock increases by $1, the option’s price would theoretically increase by 50 cents.

For options traders, delta also represents the hedge ratio for creating a delta-neutral position. For example if you purchase a standard American call option with a 0.40 delta, you will need to sell 40 shares of stock to be fully hedged. Net delta for a portfolio of options can also be used to obtain the portfolio’s hedge ration.

A less common usage of an option’s delta is it’s current probability that it will expire in-the-money. For instance, a 0.40 delta call option today has an implied 40% probability of finishing in-the-money. (For more on the delta, see our article: Going Beyond Simple Delta: Understanding Position Delta.)


Theta (Θ) represents the rate of change between the option price and time, or time sensitivity – sometimes known as an option’s time decay. Theta indicates the amount an option’s price would decrease as the time to expiration decreases, all else equal. For example, assume an investor is long an option with a theta of -0.50. The option’s price would decrease by 50 cents every day that passes, all else being equal. If three trading days pass, the option’s value would theoretically decrease by $1.50.

Theta increases when options are at-the-money, and decreases when options are in- and out-of-the money. Options closer to expiration also have accelerating time decay. Long calls and long puts will usually have negative Theta; short calls and short puts will have positive Theta. By comparison, an instrument whose value is not eroded by time, such as a stock, would have zero Theta.


Gamma (Γ) represents the rate of change between an option’s delta and the underlying asset’s price. This is called second-order (second-derivative) price sensitivity. Gamma indicates the amount the delta would change given a $1 move in the underlying security. For example, assume an investor is long one call option on hypothetical stock XYZ. The call option has a delta of 0.50 and a gamma of 0.10. Therefore, if stock XYZ increases or decreases by $1, the call option’s delta would increase or decrease by 0.10.

Gamma is used to determine how stable an option’s delta is: higher gamma values indicate that delta could change dramatically in response to even small movements in the underlying’s price.Gamma is higher for options that are at-the-money and lower for options that are in- and out-of-the-money, and accelerates in magnitude as expiration approaches. Gamma values are generally smaller the further away from the date of expiration; options with longer expirations are less sensitive to delta changes. As expiration approaches, gamma values are typically larger, as price changes have more impact on gamma.

Options traders may opt to not only hedge delta but also gamma in order to be delta-gamma neutral, meaning that as the underlying price moves, the delta will remain close to zero.

Vega (V) represents the rate of change between an option’s value and the underlying asset’s implied volatility. This is the option’s sensitivity to volatility. Vega indicates the amount an option’s price changes given a 1% change in implied volatility. For example, an option with a Vega of 0.10 indicates the option’s value is expected to change by 10 cents if the implied volatility changes by 1%.

Because increased volatility implies that the underlying instrument is more likely to experience extreme values, a rise in volatility will correspondingly increase the value of an option. Conversely, a decrease in volatility will negatively affect the value of the option. Vega is at its maximum for at-the-money options that have longer times until expiration.

Those familiar with the Greek language will point out that there is no actual Greek letter named vega. There are various theories about how this symbol, which resembles the Greek letter nu, found its way into stock-trading lingo.

Rho (p) represents the rate of change between an option’s value and a 1% change in the interest rate. This measures sensitivity to the interest rate. For example, assume a call option has a rho of 0.05 and a price of $1.25. If interest rates rise by 1%, the value of the call option would increase to $1.30, all else being equal. The opposite is true for put options. Rho is greatest for at-the-money options with long times until expiration.

Minor Greeks

Some other Greeks, with aren’t discussed as often, are lambda, epsilon, vomma, vera, speed, zomma, color, ultima.

These Greeks are second- or third-derivatives of the pricing model and affect things such as the change in delta with a change in volatility and so on. They are increasingly used in options trading strategies as computer software can quickly compute and account for these complex and sometimes esoteric risk factors.

Risk and Profits From Buying Call Options

As mentioned earlier, the call options let the holder buy an underlying security at the stated strike price by the expiration date called the expiry. The holder has no obligation to buy the asset if they do not want to purchase the asset. The risk to the call option buyer is limited to the premium paid. Fluctuations of the underlying stock have no impact.

Call options buyers are bullish on a stock and believe the share price will rise above the strike price before the option’s expiry. If the investor’s bullish outlook is realized and the stock price increases above the strike price, the investor can exercise the option, buy the stock at the strike price, and immediately sell the stock at the current market price for a profit.

Their profit on this trade is the market share price less the strike share price plus the expense of the option—the premium and any brokerage commission to place the orders. The result would be multiplied by the number of option contracts purchased, then multiplied by 100—assuming each contract represents 100 shares.

However, if the underlying stock price does not move above the strike price by the expiration date, the option expires worthlessly. The holder is not required to buy the shares but will lose the premium paid for the call.

Risk and Profits From Selling Call Options

Selling call options is known as writing a contract. The writer receives the premium fee. In other words, an option buyer will pay the premium to the writer—or seller—of an option. The maximum profit is the premium received when selling the option. An investor who sells a call option is bearish and believes the underlying stock’s price will fall or remain relatively close to the option’s strike price during the life of the option.

If the prevailing market share price is at or below the strike price by expiry, the option expires worthlessly for the call buyer. The option seller pockets the premium as their profit. The option is not exercised because the option buyer would not buy the stock at the strike price higher than or equal to the prevailing market price.

However, if the market share price is more than the strike price at expiry, the seller of the option must sell the shares to an option buyer at that lower strike price. In other words, the seller must either sell shares from their portfolio holdings or buy the stock at the prevailing market price to sell to the call option buyer. The contract writer incurs a loss. How large of a loss depends on the cost basis of the shares they must use to cover the option order, plus any brokerage order expenses, but less any premium they received.

As you can see, the risk to the call writers is far greater than the risk exposure of call buyers. The call buyer only loses the premium. The writer faces infinite risk because the stock price could continue to rise increasing losses significantly.

Risk and Profits From Buying Put Options

Put options are investments where the buyer believes the underlying stock’s market price will fall below the strike price on or before the expiration date of the option. Once again, the holder can sell shares without the obligation to sell at the stated strike per share price by the stated date.

Since buyers of put options want the stock price to decrease, the put option is profitable when the underlying stock’s price is below the strike price. If the prevailing market price is less than the strike price at expiry, the investor can exercise the put. They will sell shares at the option’s higher strike price. Should they wish to replace their holding of these shares they may buy them on the open market.

Their profit on this trade is the strike price less the current market price, plus expenses—the premium and any brokerage commission to place the orders. The result would be multiplied by the number of option contracts purchased, then multiplied by 100—assuming each contract represents 100 shares.

The value of holding a put option will increase as the underlying stock price decreases. Conversely, the value of the put option declines as the stock price increases. The risk of buying put options is limited to the loss of the premium if the option expires worthlessly.

Risk and Profits From Selling Put Options

Selling put options is also known as writing a contract. A put option writer believes the underlying stock’s price will stay the same or increase over the life of the option—making them bullish on the shares. Here, the option buyer has the right to make the seller, buy shares of the underlying asset at the strike price on expiry.

If the underlying stock’s price closes above the strike price by the expiration date, the put option expires worthlessly. The writer’s maximum profit is the premium. The option isn’t exercised because the option buyer would not sell the stock at the lower strike share price when the market price is more.

However, if the stock’s market value falls below the option strike price, the put option writer is obligated to buy shares of the underlying stock at the strike price. In other words, the put option will be exercised by the option buyer. The buyer will sell their shares at the strike price since it is higher than the stock’s market value.

The risk for the put option writer happens when the market’s price falls below the strike price. Now, at expiration, the seller is forced to purchase shares at the strike price. Depending on how much the shares have appreciated, the put writer’s loss can be significant.

The put writer—the seller—can either hold on to the shares and hope the stock price rises back above the purchase price or sell the shares and take the loss. However, any loss is offset somewhat by the premium received.

Sometimes an investor will write put options at a strike price that is where they see the shares being a good value and would be willing to buy at that price. When the price falls, and the option buyer exercises their option, they get the stock at the price they want, with the added benefit of receiving the option premium.

A call option buyer has the right to buy assets at a price that is lower than the market when the stock’s price is rising.

The put option buyer can profit by selling stock at the strike price when the market price is below the strike price.

Option sellers receive a premium fee from the buyer for writing an option.

In a falling market, the put option seller may be forced to buy the asset at the higher strike price than they would normally pay in the market

The call option writer faces infinite risk if the stock’s price rises significantly and they are forced to buy shares at a high price.

Option buyers must pay an upfront premium to the writers of the option.

Real World Example of an Option

Suppose that Microsoft (MFST) shares are trading at $108 per share and you believe that they are going to increase in value. You decide to buy a call option to benefit from an increase in the stock’s price.

You purchase one call option with a strike price of $115 for one month in the future for 37 cents per contact. Your total cash outlay is $37 for the position, plus fees and commissions (0.37 x 100 = $37).

If the stock rises to $116, your option will be worth $1, since you could exercise the option to acquire the stock for $115 per share and immediately resell it for $116 per share. The profit on the option position would be 170.3% since you paid 37 cents and earned $1—that’s much higher than the 7.4% increase in the underlying stock price from $108 to $116 at the time of expiry.

In other words, the profit in dollar terms would be a net of 63 cents or $63 since one option contract represents 100 shares ($1 – 0.37 x 100 = $63).

If the stock fell to $100, your option would expire worthlessly, and you would be out $37 premium. The upside is that you didn’t buy 100 shares at $108, which would have resulted in an $8 per share, or $800, total loss. As you can see, options can help limit your downside risk.

Options Spreads

Options spreads are strategies that use various combinations of buying and selling different options for a desired risk-return profile. Spreads are constructed using vanilla options, and can take advantage of various scenarios such as high- or low-volatility environments, up- or down-moves, or anything in-between.

Spread strategies, can be characterized by their payoff or visualizations of their profit-loss profile, such as bull call spreads or iron condors. See our piece on 10 common options spread strategies to learn more about things like covered calls, straddles, and calendar spreads.

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