The 2026 Intern’s Guide to Options

Options trading has become increasingly popular in recent years, and we thought it was time to update our guide for U.S. options to help you understand options and how options markets work.

Today, we’ll go through:

1. The differences between options and stocks
2. The mechanics of an option
3. What gives an option its value
4. The math that drives options pricing
5. What drives activity in the options markets
6. How options market structure compares to stocks

How options are different from stocks

Options are very different from stocks and futures.

Once you buy a stock, you benefit if its price rises and lose if its price falls. You also earn dividends. If you short sell a stock, the reverse is true. We show that in the payoff diagrams below – note that the profit (and loss) for stocks increases in a straight line as stock price moves.

Chart 1: When you buy (or sell) stocks, you profit as the price rises and lose if the price falls (or vice versa)

How do options work?

The easiest way to think about an option is tocompareit tohow an insurance policy works. There is a premium, that you may never get back, but a payoff that rises in response to a material event (in our case, a stock’s rise or fall).

With options:

• You can buy or sell (no short sell rules or shares to borrow, just open interest).
• There are also puts (to protect against price falls) and calls (which profit when a stock price rises).
• Each with many choices for “strikes” and “expiries.”

How do option payoffs work?

We start (below) with how the profits and losses work for calls.

A call is a right to buy the underlying at a specific, or “strike,” price in the future. For simplicity, we often use the word “stock” instead of underlying in this blog post, but many underlying exposures can have options on them.

Call options are all about stocks going up. For a call buyer, at the time of expiration, the price of the underlying asset needs to be ABOVE the strike, by at least what you paid for the option, for the option to return a profit. We show how that works in the charts below. For example, if you buy an option for $5 with a strike of $100:

• If the (underlying) stock never rises above $100, the call will expire worthless. Why would you pay $100 for an $80 stock if you had the option not to!?
• But once the underlying stock price rises above $100, the option is “in the money” (meaning it has intrinsic value, more on that later). However, because of the “time value” (chance the option becomes even more valuable) it is usually NOT worth exercising early.
• If the underlying increases to $102, you could “exercise” the option to buy at $100, giving you a $2payoff. Although that helps, it still doesn’t offset the cost of the option premium.
• If the underlying increases to $105, you could “exercise” the option to buy at $100, giving you a $5profit. Then, the payoff from the option offsets the cost of the option premium. This is known as the options “breakeven.”
• If the underlying stock rises more — say to $109 — you could “exercise” the option to buy at $100, giving you a $9payoff on the exercise. In that case, your payoff more than offsets the option premium, resulting in profit of $4 on the trade.

For a call seller (short), the opposite is true. They collect, or earn, the premium when they sell the option. Then they hope the stock doesn’t rise above the strike price, as then they will be called to sell the stock at $100 and incur losses. In theory, a stock price can rise for ever, so the seller of a call has “undefined risk.”

Chart 2: Call options payoff

In contrast, a put option gives the buyer the right to sell the underlying when the contract expires. Put options are all about stocks going down. A put buyer profits when the price of the underlying asset falls BELOW the strike price of the option.

We see from the payoff diagrams that a put buyer again pays a premium. However, this time they only profit when the stock falls.

While the put seller earns the premium, which they keep unless the stock falls below the strike.

Chart 3: Put options payoff

Note that:

• The buyer of any option can only lose the premium they are paying.
• The seller (or writer) of the option has increasing, and sometimes unlimited, downside as the stock rises (for calls) and falls (for puts).

Table 1: Potential losses on puts and calls for buyers and sellers

But the differences don’t stop at the payoff diagram. Options also trade differently than stocks do — and that’s just as important as the payoff itself. For starters:

• A single stock usually has just one listing.
• An option on that same stock can have dozens of expiration dates and hundreds of strike prices, each one technically a different contract, with its own price, its own liquidity, and its own risk profile. AAPL, for example, trades as one stock. But it has roughly 2,000 listed options contracts you could choose from.

Options markets are also built differently:

• Stocks trade across lit exchanges and dark pools, with trades reported to a consolidated tape.
• Options trade on their own separate set of venues, cleared centrally through one clearinghouse (the OCC), and quoted on their own tape (OPRA)- plumbing we’ll come back to later. For now, just keep in mind: same underlying company, very different instrument.

Generally, one option represents one round lot (or 100 shares)

You might know that most stocks have “round lots” of 100 shares, even though they can also trade in smaller numbers of shares or “odd lots.”

Stock options are designed around round lots. One stock option trade represents 100 shares of the underlying security. However, option prices are quoted per share (just like stocks), which means someone buying an option priced on screen at $1 will need to pay $100 ($1 x 100 shares) to settle their trade.

Index options are a little different, as they can set their own, sometimes different, “multipliers” (although many are still set to 100 x index price). For example:

• The Nasdaq-100 index is around 20,000.
• One NDX contract has a multiplier of 100, giving the underlying exposure (or “notional” exposure) of around $2 million (20,000 x 100).
• However, mini options exist representing 1/100th of the value of the original index. That keeps the same multiplier of 100 but reduces the notional exposure to $20,000 - and reduces the cash required to settle a trade at the same “price.”

Why does expiry matter?

Every option expires. And just like insurance contracts, once the option has expired, it ceases to exist. If an option buyer didn’t “exercise” the option, the seller gets to keep the premium.

That’s exactly why expiry matters so much to traders.

Most investors want continuous protection or continuous exposure. So, as expiry approaches, traders often “roll” their position: They sell the “about-to-expire” contract and simultaneously buy the next one out, re-establishing the same exposure with a fresh clock.Think of it like renewing your car insurance before the old policy lapses.

This rolling behavior is precisely why trading volume spikes around expiry dates, and it’s most extreme on Triple-Witching days, when monthly stock options, index options, and quarterly futures all expire on the same day. As traders unwind and reestablish positions, it can lead to outsized trade volumes.

But not all expiries settle the same way, and that difference shapes how traders position themselves ahead of time.

• Index products (options and futures) settle in cash for a simple reason: There’s nothing to deliver. A stock is a real, transferable asset, while an index is a calculated basket of stocks. You can’t hand someone “the Nasdaq-100,” so the clearer calculates the profit or loss and transfers cash between the buyer and seller. Traders typically use a patchwork of proxies (QQQ shares, NQ futures, etc.) to hedge exposure on Nasdaq-100 options.
• Stock options (and index trades) settle physically because a stock is a discrete, deliverable thing. Exercising the option means actually transferring shares at the agreed-upon strike price.

Timing adds another wrinkle. Index products (options and futures) expire in the open auction (for standard monthly expiries), while stock options expire in the close auction. That timing difference matters for execution — traders managing both an index hedge and single-stock positions around the same expiry need to account for the fact that they aren’t unwinding at the same time.

Chart 4: How an expiry date works for different products

One last nuance worth knowing: Because physical settlement depends on a decision made after the market closes, but before the 5:30 p.m. ET cutoff for assigning delivery, the price can still move in that window. That’s part of why the OCC allows traders to “abandon” an in-the-money American option rather than be forced into an exercise that price action after the close has made undesirable.

What drives the value of an option?

There are a number of different factors that make an option more valuable.

Moneyness (also called intrinsic value)

The easy way to think about intrinsic value is to ask: if you exercised this option today, would you make money?

That relationship between the strike and the stock price has a name, “moneyness”, and it comes in three flavors:

• Out-of-the-money (OTM): For a call, the strike is above today’s price. The stock still has work to do before the option pays off, so there is no intrinsic value. At this time, although there is some probability that the option will expire with value, it is currently OTM. However, that also makes its value and premium lower. These are the cheapest seats in the house.
• In-the-money (ITM): The strike sits below today’s price for a call (vice-versa for a put). Exercise it right now and you’re already ahead, that is real intrinsic value stacked on top of whatever extrinsic value is left. Naturally, that makes ITM options a lot pricier.
• At-the-money (ATM): The strike equals the underlying asset’s price. No intrinsic value yet, but this is the pressure point, the spot where a small move in the stock does the most to swing the option’s fate.

Extrinsic value

Everything else is considered “extrinsic value.” It's the market’s best guess at how much more profitable the option could become before it expires. That guess is really just a function of two things: volatility and time.

Add intrinsic and extrinsic value together. And you’ve got the option’s premium.

Why volatility matters

Think of how an insurer prices risk. A house in a wildfire zone is statistically more likely to “file a claim” (i.e., make a big move). So, the market, acting as an insurer, charges a fatter premium to compensate.

That’s similar to a more volatile stock, which is more likely to rise past the next options strike and expire “in the money.”

As a reminder, this study discussed how volatility works in real markets. We see that it:

• Includes up and down moves.
• The range of cumulative price moves increases the longer you wait.
• The range of likely price moves also increases the higher the “volatility” of the underlying asset.
• Volatility is calculated from the standard deviation of daily price moves.

Chart 5: Daily returns for two different assets; one with higher volatility (yellow) than the other (blue)

Chart 6 adds all the dots at different price moves and shows how often an asset moves by a given amount.

This plot is the probability distribution of where the stock might land at expiry under two scenarios, normal volatility and high volatility, against a fixed OTM call strike.

The “high-vol” curve has more grey area, showing the chance of expiring above the strike is higher. A bigger grey area means more, and bigger expected payoffs. That converts into a higher option premium.

Chart 6: Higher volatility means a higher chance of a big change in stock price, making the option more likely to be profitable

Extrinsic value: why time matters, too

Time works the same way. The longer until expiration, the more chances the stock gets to wander past the strike in either direction.

Conversely, that’s exactly why extrinsic value falls as expiration approaches. Traders call this “time decay,” even when nothing else about the stock has budged an inch.

• Volatility is about how wide the range of possible outcomes is.
• Time is about how long that range gets to spread out.

Intrinsic and extrinsic value in the real world

Chart 7 takes a look at all two very similarly priced stocks, and how options prices in all the different dimensions (time, strike, underlying volatility compare in the real world.

Chart 7: Time, volatility and moneyness all add value, but in different ways

Take AAPL and TSLA on the same day (7/23/26). Both stocks were trading at almost exactly the same price, with AAPL closing at $321.66 and TSLA at $319.69. If price were the only thing that mattered, their options should cost about the same. They don’t, however, and the gaps tell you exactly why.

• Moneyness: Notice how each line has a “kink” in it, right around the strike. That’s where an option becomes ATM and steadily increases the likelihood it will expire ITM.
• Volatility: Compare the same color line across AAPL and TSLA. Note that TSLA options cost more in all instances (even though the stocks are basically the same price). For example, AAPL’s one month at-the-money implied volatility sat around 25%; TSLA’s sat around 46%. Same stock price, same distance from strike, same amount of time left, much more in premium. That is volatility raising the price.
• Time: Now looking at the different colors in each chart, the less time to expiry (blue) is always cheaper than 1 week to expiry (orange), which is always cheaper than months to expiry (purple). More time to expiry means more chances for the stock to move past the strike, so the market charges more to keep an option open that long.

One chart, three dials, same story. Volatility asks, “how far could this stock realistically move?” Time asks, “how long does it have to get there?” Moneyness asks “how far does it have to travel?” Every option’s extrinsic value is really just the market’s answer to all three questions at once, multiplied together and stitched into one price.

What options trade the most?

Given everything above, it’s worth asking: How do traders actually behave?

Turns out, trading activity is overwhelmingly concentrated at-the-money, but with more interest in OTM options – which as we saw in Chart 7, also cost less, potentially giving higher leverage on returns.

Chart 8: Most options trade at-the-money or slightly out-of-the-money

Black-Scholes is the math used to calculate option premiums

Hopefully, everything we’ve said so far seems mostly intuitive. Options are like insurance:

1. A small house is cheaper to insure than a large house (the replacement cost of the underlying asset matters).
2. High co-pay is cheaper than no co-pay (strike price and moneyness matters).
3. One month of insurance is cheaper than 12 months of insurance (time to expiry).
4. A home in the plains is cheaper to insure than a home in a wildfire zone (volatility).

But how does the option market work out “how much cheaper” the premium should be?

It turns out there is math to estimate the profits in any grey zone (like we talked about in Chart 6) if you know a few things. It was created by two, now infamous academics: Black & Scholes. If you know some specific key facts, most of which we’ve already talked about, you can calculate the expected payoff or the option:

1. The price of the underlying asset
2. The strike price of the options contract
3. Time until the option expires
4. The implied volatility of the underlying asset
5. Whether the options contract is a call or a put
6. The risk-free interest rate

Like many academic formulas, Black-Scholes doesn’t perfectly fit the real world. For a start:

• Stock prices are not (quite) normally distributed.
• The risk-free rate of interest isn’t (really) constant (thanks to the economy and the Federal Reserve!).
• Volatility will almost certainly change over the life of the option, especially given that prices tend to fall much more quickly than they rise (leading to something called the “volatility skew”).
• Some options can be exercised before expiry (called American options, which happen to be what mostly trades in the U.S.).

The fact that volatility changes over time is important. Because options traders are smart, they already know this, so they don’t calculate the option premium based on what has already happened; they calculate it based on what they expect to happen.

Interestingly, that means that once you know what the premium agreed in the market is, you can use the math to reverse engineer the “implied volatility.” That is, based on what someone was willing to pay for the option, what is their expected volatility of the stock until expiry.

In many respects, every options trade is a bet on volatility. And often, professional traders quote options in “implied volatility” terms, not cents. That’s also what the VIX is designed to measure across a portfolio of different S&P 500 option strikes (all with an average 30 days to expiry).

Greeks help represent different risk factors

There is a reason that people often talk about “Delta” hedging an option and option portfolio “Greeks” - it’s all about the algebra and calculus in the Black & Scholes formula. Although there are more, the most common ones you will hear on the desk are:

Table 2: Options “Greeks” for dummies

Now that we’ve laid out all the Greeks side by side, let’s walk through what each one actually means in practice – and how traders use them to understand risk and payoff in real time.

• Delta: Perhaps the most important first Greek letter to learn, Delta comes from the calculus that is used in pricing options. Delta is the standard math symbol for rate of change – and that’s how it is used in options too. It shows how much the premium of the option is expected to change for a given movement of the underlying stock. You can see delta changing based on “money-ness” in Chart 8. The slope of the red and green lines changes as the moneyness of the option changes. Note that a well OTM option is unlikely to be exercised, so its premium is low and doesn’t increase very fast, but a more ITM option premium increases almost $1 for every $1 stock prices, so Delta can sometimes be thought of as an approximation of the probability that an option will expire ITM. Delta is also a measure of how much to hedge an option trade. For instance, if the delta is 40, you need to hedge 40% of the options notional (or 40 shares for every 1 option).
• Gamma: We can see that Delta changes as the stock price changes. That also means traders need to adjust their delta-hedge (up or down), depending on the new delta. That rate of change in delta is known as “Gamma.” When options are near expiry, Gamma is important because an option can rapidly go from out-of-the-money (no payout at expiration) to in-the-money (a payout at expiration).
• Theta: This brings us to Theta, also known as time decay. Holding all other factors constant, all options lose value over time. That’s because the likelihood that we see a 5% move in a week is higher than the chance that happens with just 1 day to go until expiry.
• Vega: While Vega is not a Greek letter (it’s actually the name of a star), it is the relationship between an option’s price change and a change in implied volatility. Remember, options prices increase as expected volatility increases, and are often quoted in volatility points, so Vega is important to traders.

What can you buy options on?

In the U.S. equity market, you can get options on thousands of company stocks, hundreds of exchange-traded funds(ETFs — like QQQ), or even an index (like the Nasdaq-100).

Index (and ETF) options would let you insure or gain exposure to a portfolio that was similar to the index (or ETF) while a stock option would let you insure or gain exposure to a single company stock you own.

We see that a lot of trading occurs in single stock options (Chart 9, purple inner ring). However, because stock prices are lower than indexes' values (the Nasdaq-100 index is around 20,000), the value of exposure traded in index options is actually much larger (grey in the outer ring).

Chart 9: The majority of options trading is in very liquid underlying assets

How frequently do options expire?

The U.S. equity options market has grown significantly since the early 1970s. Trading today adds up to around 53 million contracts a day, with delta-adjusted exposures of around $250 billion each day – around half as much as the exposure trading in stocks.

As Chart 10 shows, there are options that expire quarterly, monthly and weekly. Apart from better matching option protection with cash flows, sellers of shorter dated options have the potential to realize more Theta – as time decays more quickly toward the end of an options life. A number of weekly expiries potentially allow investors to sell Theta more effectively, and limit max-downside on a single position, than with quarterlies.

Still, the majority of trading occurs on monthly expiries.

Chart 10: Historical options volume by expiration type

Importantly, the same choices of expiry don’t exist for all assets (Table 3):

• Quarterly: There are actually just a handful of ETFs and indexes with quarterly expiries. These expire on the last day of the quarter.
• Monthly: The majority of options have an expiry each month. That expiry happens on the third Friday of the month, which sometimes coincides with index rebalances, creating what is known as Quad Witching.
• Weekly: Around 600 other stocks (for this purpose, ETFs are a stock) are available with an expiry every week. These (almost) always expire on a Friday, except when a monthly option already exists with the same Friday expiry.
• (Almost) Daily: The most popular index products now have weekly options that expire on different days of the week. Although only the S&P 500, Nasdaq-100, and Russell 2000 offer investors weekly options with the choice of an expiry on every day of the week.

Table 3: Different option underlying, expiry frequencies and settlement conventions

Stocks & options are SEC-regulated “securities,” but options markets are different

Stocks, equity options and corporate bonds are all “securities” under the law and, therefore, governed by the U.S. Securities and Exchange Commission (SEC).

Chart 11: Similarities and differences between stock and options markets

In some ways, options markets are similar to stock markets, and in other ways they are quite different.

There are around 18 options exchanges

One of the similarities with stocks is venue competition (fragmentation). There are currently 18 different option exchanges competing for orders, including venues run by Nasdaq, Cboe and the New York Stock Exchange, with that number expected to rise to 20 soon.

Chart 12: The U.S. options exchange market

There is a central clearer and security fungibility

The Options Clearing Corporation (OCC) settles all options traded on regulated exchanges, so options purchased on one exchange can be sold on another, making the options fungible from exchange to exchange.

There is a consolidated tape (and prop feeds)

The Options Price Reporting Authority (OPRA) consolidates all bid/offer and transaction information from all the options exchanges nationally. Large options trading firms subscribe to this consolidated tape and typically subscribe to “proprietary” feeds from each individual exchange, too.

There is a trade through rule

Just like in stocks, in order to protect customers, brokers can't “trade-through” (trade at an inferior price) any better quote on another exchange.

There are exceptions to this “no trade through” rule involving complex orders and multi-leg spread trades.

There are no dark pools

One of the biggest differences between the stock and options markets is the lack of a Trade Reporting Facility (TRF) in options. In theory, that means all trading must happen on exchanges; although, it doesn’t stop institutions trading over-the-counter (OTC) options, using the International Swaps and Derivatives Association.

However, it does mean retail trade on-exchange. Although sometimes that occurs in intraday price-improvement auctions, similar to what have been proposed for the U.S. stock market.

There are (way) more options than stocks (and a lot more messages)

There are roughly 10,000 NMS securities trading on U.S. stock markets — from ADRs to ETFs and company stocks.

Only half of the stocks qualify for options. There are specific listing standards to qualify for trading equity options, including a diversified investor base (number of shareholders), and being liquid enough to hedge the options exposures being created. Listing rules may vary depending on the product; for example, index options have specific listing rules as do ETFs.

Despite that, there are over 1.6 million “tickers” in the options market. How?

Chart 13: Comparing the number of securities in stock and options exchanges

If you think about it this way: There is just one AAPL stock.

But for AAPL options, there are:

• Puts and calls
• Expiring M/W/F for the next two weeks, every week for the next eight weeks, and every month for the next year
• With a number of strikes, from deep in the money to deep out of the money
• And for each of them, a market maker needs to try to quote bids and offers, across 17 venues

That’s around 3,500AAPL options and a lot more message traffic.

Chart 14: One underlying stock can have thousands of options listed

In short, for each stock with an option, there are hundreds of permutations of puts, calls, expiries and a range of strike prices.

Options need to be a quote-driven market

All the different options above add to well over 1 million strikes available to trade.

That makes it highly unlikely that “natural” investors would want to trade the opposite way in exactly the same strike and expiry, call or put, over the same underlying stock. In fact, data shows that on a typical day less than 20% of available listed strikes will be traded.

That’s why market makers are critical to options markets.

It also requires a huge investment in technology:

• Computers need to constantly redo some Black-Scholes math to update for every underlying change.
• And they need to post bids and offers across 1.5 million tickers and 18 different venues.

That dependency shows up directly in the plumbing. Many exchanges appoint Lead Market Makers (LMMs) to each underlying ticker, and in return for fee incentives, LMMs take on quoting obligations (they must keep two-sided quotes up across all strikes throughout the day).

Proprietary feeds and co-location are important for many market making businesses given the huge quantity of options securities to quote and the dependence of option prices on the underlying stock prices, which also trade all over the market.

That’s also why options exchanges (and the OPRA) need to process tens of billions of messages every day — far more than created by the stock market.

Options are derivatives of stocks, but they trade quite differently

As we’ve shown, an option price is derived from the prices and volatility of the underlying stock (or equity index) they track – that’s why they’re called a “derivative.”

They’re also securities under U.S. law.

But that’s about where the similarities stop. Options are more complex, require different retail investor signoffs, trade on-exchange, expire regularly, and need to be rolled if you want to maintain exposure.

However, for investors, options offer a lot of things that stocks don’t, which can sometimes be helpful.

They let you potentially insure your position or portfolio from losses or increase portfolio income by selling premiums. That can significantly change the risk-return or yield of an investor's portfolio.

That’s likely why there are so many popular new ETFs with options in the market these days, too.