The Financial world
has developed a special investment based language to help describe the
options market. Often at times one is confronted with a term which is
totally alien to them, or has a completely different meaning from what
one thought. Misunderstanding these terms can sometimes lead to the
wrong conclusion, and that can cost you money!
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Assignment - The
receipt of an
Exercise notice by an options writer that requires the writer to
Sell (in the case of a call) or
Purchase (in the case of a put) the
Underlying security at the specified strike price.
At-the-money - An option is at the
Money if the strike price of the option is equal to the
Market price of the
Underlying security. For example, if xyz
Trading at 54, then the xyz 54 option is at the money.
Buy-Write Transaction - The simultaneous purchase of
100 shares of stock and sell of one call option.
Call - This is a
Contract that gives the holder the
Buy a certain quantity (usually 100 shares) of an
Underlying security from the writer of the option, at a specified
price (the strike price)
Up to a specified date (the
Expiration date). An option that gives the holder the right to buy
the underlying futures contract.
Chicago Board Options Exchange (CBOE) - A securities
Exchange created in the early 1970s for
The Public trading of standardized option contracts. Primary
Place stock options, foreign
Currency options, and index options (S&P 100, 500, and OTC 250
Covered call - A short
Call option position in which the writer owns the number of
Shares of the underlying
Stock represented by the option contracts.
Covered calls generally limit the
Risk the writer takes because the stock does not have to be bought
at the Market
price, if the holder of that option decides to
Covered call writing strategy - A
Strategy that involves writing a
On securities that the
Investor owns. See:
Hedge option strategies.
Covered option - Option position that is
Offset by an equal and opposite position in the
Underlying security. Antithesis of naked option.
- The Right
granted under the terms of a listed options contract.
Exercise their right to
Underlying security. Put holders exercise their right to
Sell the underlying security. There is generally an
Exercise limit placed by the options exchange. This is to prevent a
group of investors or an individual
Cornering the market on an underlying security. o implement the
right of the holder of an option to buy (in the case of a call) or sell
(in the case of a put) the underlying security.
Exercise notice - A broker's notification a client
Buy or Sell
On the Type
of contract) the
Underlying security of the option contract.
Expiration - The date, after which, the option is no
longer a valid contract.
Expiration date - The
last day (in the case of American-style) or the only day (in the case of
On which an option may be exercised. For
Stock options, this date is the Saturday immediately following the
third Friday of the
Expiration month; brokerage firms may set an earlier deadline for
notification of an option holder's intention to exercise. If Friday is a
Last trading day will be the preceding Thursday.
In-the-money option - An option that has value. A call
option with a strike price lower then the price of the underlying
security, or a put option with a strike price higher then the price of
the underlying security.
Leaps - Term Equity
Anticipation Securities. Currently, these are long
Term put and call options with January expirations
Up to 2-1/2 years.
Long position - Owning or
holding options (i.e., the number of contracts bought exceeds the number
of contracts sold). For equities, a
Long position occurs when an individual owns securities. An owner of
is said to be "Long the stock."
account - A leverageable
Account in which stocks can be purchased for a
Cash and a loan. The
Loan in the margin account is collateralized by the stock; if the
value of the
Stock drops sufficiently, the owner will be asked to either put in
more cash, or
Sell a portion of the stock. Margin rules are federally regulated,
but margin requirements
And interest may vary among broker/dealers.
Margin requirement (options) - The amount of
Cash an uncovered (naked) option writer is required to deposit and
Cover his daily position
Valuation and reasonably foreseeable
Intraday price changes.
Naked option strategies - An unhedged
Exclusive use of one of the following: Short
Call strategy (selling or writing call options), and
Short put strategy (selling or writing put options). By themselves,
these positions are called
Naked strategies because they do not involve an offsetting or
risk-reducing position in another option or the
Underlying security. Related:
Covered option strategies. Antithesis of covered option.
Obligation - A
LEGAL responsibility, such as to repay a debt. Attributes
forsed upon the seller of an option.
(Options contract) - A contract that gives its owner the right but not
the obligation, to earthier buy or sell specified underlying assets at
specified price for a specified period of time.
Option spread - The
Trading of options of the same
Class at the same time in
Profit from changes in the
Size of the spread between different options.
Out-of-the-Money - A
Call option whose strike price is higher than the
Market price of the
Underlying security, or a put option whose strike price is lower
than the Market
price of the underlying security.
Option premium - The option price.
option - An option contract that gives its owner the right but not the
obligation to sell the underlying assets at the strike price for a
Put Call Ratio - The
Ratio of the volume of put options traded to the volume of
Call options traded, which is used as an indicator of
Investor sentiment (bullish or bearish).
Put-call parity relationship - The relationship between the price of a
put and the price of a
Call on the same
Underlying security with the same
Expiration date, which prevents
Arbitrage opportunities. Holding the underlying
Stock and buying a put will
Deliver the exact payoff as buying one call and investing the
Present value (PV) of the
Exercise price. The call value equals C = S + P - PV(k).
Short - One who has sold a
Contract to establish a
Market position and who has not yet
Closed out this position through an offsetting purchase; the
opposite of a long position.
Stock index option
- An option in which the
Underlying is a
Common stock index.
Stock option - An option whose underlying
Asset is the
Common stock of a corporation.
Strike index - For a
Stock index option, the index value at which the buyer of the option
can Buy or
Underlying stock index. The
Strike index is converted to a dollar value by multiplying by the
Striking price - The price at which an option can be
spread strategy - Buying and selling puts and calls with the same
Exercise price but different
Expiration dates, and trying to
Profit from the different premiums of the options.
Time until expiration - The time remaining until a
Contract expires. Also called time to maturity.
Time value of an option - The portion of an option's
premium that is based
On the amount of time remaining until the
Expiration date of the option contract, and the idea that the
Underlying components that determine the value of the option may
change during that time. Time value is generally equal to the difference
between the premium and the intrinsic value.
Uncovered call - A short
Call option position in which the writer does not own
Shares of underlying
Stock represented by the option contracts. Uncovered calls are much
riskier for the writer than a
Covered call, where the writer of the
Uncovered call owns the
Underlying stock. If the buyer of a call exercises the option to
call, the writer would be forced to
Asset at the current
Market price. Also called a "naked" asset.
Uncovered put - A
Short put option position in which the writer does not have a
Stock position or has not deposited, in a
Cash account, cash or cash equivalents equal to the
Exercise value of the put. The writer has pledged to
Asset at a certain price if the buyer of the option chooses to
Uncovered put options limit the writer's
Risk to the value of the stock (adjusted for premium received.) Also
called "naked" puts.
Underlying asset - The security or property or
Loan agreement that an option gives the
Option holder the
Buy or to sell.
Volatility risk - The
Risk in the value of options portfolios due to the unpredictable
changes in the volatility of the
Write call - Sell a call when owning the underlying
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