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Options Pricing: A Review Of Basic Terms

When information about options, it can be helpful to understand basic options pricing phrases. Here’s a review of basic option terminology. Use it as a reference throughout this tutorial. 

American Opportunities Options that can be exercised at any point during the life of the contract. Most exchange-traded choices are American.

At-the-Money An option whose strike price is equal to the merchandise price of the underlying security.

Call An option that gives the holder the straight to buy the underlying security at a particular price for a specified, fixed period of in good time dawdle.

Contract An option that represents 100 shares of an underlying oxen.

Covered Call An option strategy in which the writer of a call privilege holds a long position in the underlying security on a share-for-share basis.

Take over Put An option in which the writer of a put option holds a short position in the underlying pledge on a share-for-share basis.

Covered Writer An option seller who owns the choice’s underlying security as a hedge against the option.

Date  The date that an privilege becomes void. Most options expire at the close of business (4:00 p.m. ET) on the third Friday of the closing month.

Derivative An investment product that derives its value from an underlying asset. Opportunities are derivatives.

Early Exercise The exercise of an option before its expiration rendezvous. Early exercise can occur with American-style options.

European Options An alternative that can only be exercised during a particular time period just now before its expiration.

Holder An investor who buys an option and makes a incentive payment to the writer.

In-the-Money An option that has an intrinsic value. A inspire a request of option is considered in-the-money if the underlying security is higher than the take on price.

LEAPS (Long-term Equity Anticipation Securities) LEAPS are publicly trucked options that have expiration dates longer than one year.

Chronicled Option A put or call option that is traded on an options exchange. The titles of the option, including strike price and expiration date, are standardized by the stock market.

Naked Option An option position in which the writer of the option does not contain an offsetting position in the underlying security, thereby having no protection against adverse tolls moves.

Open Interest The total number of outstanding option puckers in the exchange market on a particular day.

Option A financial derivative that turns the holder the right, but not the obligation, to either buy or sell a fixed amount of a custody or other financial asset at an agreed-upon price (the strike price) on or sooner than a specified date.

Out-of-the-Money An option with no intrinsic value, that determination be worthless if it expired on that day. A call option is out-of-the-money when the belabour price is higher than the market price of the underlying security. A put chance is out-of-the-money when the strike price is lower than the market penalty of the underlying security.

Over-the-Counter An option that is not traded over an commerce. An over-the-counter option has no standardization of strike prices and expiration dates.

Bait The total cost of the option. An option holder pays a premium to the opportunity writer in exchange for the right, but not the obligation, to exercise the option. In general, the selection’s premium is its intrinsic value combined with its time value.

Put An way out that gives the holder the right to sell the underlying security at a precise price for a specified, fixed period of time.

Strike Price The agreed-upon premium at which an option can be exercised. The strike price for a call option is the bonus at which the security can be bought (prior to the expiration date); the strike outlay for a put option is the price at which the security can be sold (before the expiration show ones age). The strike price is sometimes called the exercise price.

Terms The collective conditions of an selections contract that define the strike price, expiration date and the underlying guarantee.

Underlying Security The security that is subject to being bought or blow the whistle oned upon the exercise of an option.

Writer An investor who sells an option and who compiles the premium payment from the buyer. Writers are obligated to buy or sell if the holder determines to exercise the option.

Options Pricing: The Basics of Pricing

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