Most people meet options as a lottery ticket: buy a call, hope the stock rips, win big. That version is real — but it hides almost everything that actually matters, including the part this series is about: who sells you that call, and what they do the instant they have. Because that hidden activity, repeated across millions of contracts, is part of why the market moves the way it does.

This is the second piece in our series on how instruments really work. Same destination as always: the other side of the trade.

What an option actually is

An option is the right — not the obligation — to buy or sell something at a set price (the strike) by a set date. A call is the right to buy; a put is the right to sell. You pay a premium for that right. Whoever sells it to you (the writer) pockets the premium and takes on the obligation.

The everyday version: you pay €1,000 for the right to buy a specific flat at €300,000 anytime in the next three months. If it jumps to €350,000, your little contract is suddenly worth a fortune. If the market drops, you simply walk away — losing only the €1,000. That asymmetry — capped loss, large upside — is the whole appeal of a long option. A put is the mirror: insurance that pays off when the price falls.

The mechanics that surprise people

Three things trip up almost everyone.

Time works against you. An option loses value as expiry approaches, all else equal (that's "theta"). You can be right on direction and still lose, simply because the move came too slowly.

Volatility is priced in. The premium isn't only about where the stock is — it's about how much it's expected to move (implied volatility). Buy before an earnings report and you pay up for high expected movement; once the news is out, that expectation collapses ("IV crush"), and your option can lose value even if the stock moved your way.

The leverage isn't constant. Unlike a future, an option's sensitivity to the underlying changes as the price moves. That rate of change — gamma — is the key to everything that follows.

What options are actually good for

• Hedging. A put is portfolio insurance — the original, most defensible use.
• Income. Selling covered calls or cash-secured puts collects premium in exchange for taking on obligation.
• Defined-risk leverage. A long call gives leveraged upside with the loss capped at the premium.
• Real nuance. Options let you bet on volatility, time, or a range — not just up or down.

The other side — who sells you the call, and what they do next

Here's the part the lottery-ticket framing hides. When you buy a call, the counterparty is often a market maker. The instant they sell it to you, they're short the call — exposed to the stock rising. They don't want that directional bet; they want the spread. So they hedge: they buy shares of the underlying to cancel the option's directional exposure.

Then comes the interesting part. As the stock moves, the option's delta changes — that's gamma — so the hedge no longer fits, and they must re-hedge, continuously. Which way they trade depends on whether dealers, in aggregate, are long or short gamma.

When dealers are short gamma (they've sold lots of options the public is holding), their hedging chases the move: they buy as it rises and sell as it falls. That amplifies the trend — the mechanism behind a "gamma squeeze," where heavy call buying forces dealers to keep buying stock, fueling the very rally the calls were betting on.

When dealers are long gamma, their hedging does the opposite: they sell into strength and buy into weakness. That dampens moves and tends to "pin" the price near big strikes, especially as expiration nears.

So the honest answer to "does buying a call move the stock?" is: not your single call — but the aggregate hedging of dealers across huge open interest absolutely can, and the direction of that push flips depending on how dealers are positioned. It's not a one-way "buying lifts the price." It's a feedback loop that can either calm the market or accelerate it.

Your long call, by the way, isn't hedged for you — you hold the full directional bet. The hedging happens on the other side, for the dealer's book. You're paying for asymmetry; they're managing it away.

Where it goes wrong

The buyer's risk is honest and capped: you can lose the whole premium, and often do — killed by time decay or an IV crush rather than by being wrong on direction.

The seller's risk is the mirror image, and far nastier. Selling a naked call collects a small premium for theoretically unlimited risk. It's the classic "picking up pennies in front of a steamroller": you win small, repeatedly, until one move takes it all back and more. Most options blow-ups come from the short side underestimating the tail.

Why options are brutal to backtest

This matters the moment you test an options strategy. You can't just use the underlying's price. You need the historical options chain — every strike and expiry — plus implied volatility, accurate greeks, and realistic fills against a bid-ask spread that's often wide. A backtest that fills at the theoretical mid-price and ignores vega and the spread will flatter the strategy enormously. And because options P&L is fat-tailed — a handful of trades dominate — fewer than 30 trades tells you almost nothing. The instrument rewards precision; so does testing it.

Understand who's on the other side, and "options" stop being a lottery ticket and start being a system you can actually reason about.

Study the past — improve your future. 🥋

Educational content, not investment advice.