Options Trading Glossary
Options Glossary: Common Options Terminology
In order to trade options effectively, you will need to understand some basic terms before you get started.
• American Style-An option that can be exercised at any time until the expiration date
• At the money- An option where the underlying investment has reached the strike price.
• Buy-Write Transaction- The purchase of 100 shares of stock and the sale of one call option at once
• Call option-A contract that allows the holder to purchase a security at a specified price for a specified time
• Cash settled-An option where the settlement occurs in cash. No securities exchange hands
• European Style-An option that can only be exercised on the expiration date, not before
• Exercise-The process of exchanging an option contract for the underlying security
• Exercise Notice- The means whereby the option seller is notified that the buyer has exercised his or her option
• Expiration-The date whereby an option is no longer valid
• Expire worthless-Is what happens to an option that remains out of the money at expiration and is not exercised.
• Extrinsic value- The difference between an option’s intrinsic value and its premium price
• Hedge-An investment made to protect the value of another investment
• In the Money- A call option who’s underlying security has increased beyond the strike price or put option who’s underlying security has decreased beyond the strike price
• Intrinsic Value- The difference between a the strike price of an in the money option and the value of the underlying security.
• LEAPS-an acronym for Long Term Equity AnticiPation Series. These are long term options that can remain active for up to three years.
• Leg-One part of a spread position
• Margin-The amount of money that must be deposited in an account to protect the broker from loss
• Obligations- Forced attributes upon the seller of an option
• Option-A contract that grants a right, but not an obligation, to an investor to purchase a security at a predetermined price for a predetermined time.
• Out of the Money- A call option who’s underlying security has not reached the strike price yet or a put option who’s underlying security has not decreased in value to the strike price.
• Premium- The price of an option on the open market
• Put Option-A contract giving the right to an investor to sell securities at a predetermined price for a predetermined time.
• Rights-Attributes given to the owner of an option
• Straddle-An option spread that encompasses an at the money call and an at the money put at the same time with the same expiration date.
• Strike Price- The price at which the underlying investment is exchanged if the option is exercised
• Theoretical Value- The value of an option based on assumptions and mathematical calculations
• Time Decay-The tendency of time value to decrease as the option moves closer to expiration. This is expressed by Theta
• Time Value- The option’s value as it relates to the amount of time left until expiration.
• Underlying-The asset in which an option derives its value
• Volatility- The level of price movement within the market
