Basic Options Glossary
- At-The-Money
- An option is at-the-money if the market price of the underlying interest is at or near the underlying stock price.
- Buy to Close
- Buying to close is when you buy a contract that you are currently short.
- Buy to Open
- Buying to open a position is when you buy a contract that you don't already own.
- Call Option
- A contract that gives the holder the right to buy the underlying for the strike price any time until expiry.
- Cash Settlement
- Options that have cash settlement are settled by paying cash in the amount of the intrinsic value of the option. (See physical settlement.)
- Covered Writing
- Writing an option when you also hold a position that can fulfill the obligation being taken on by writing the option. The position could be in cash a convertible security or the underlying security itself. For example you could write a covered call option if you owned enough shares of the underlying stock
- Exercise Style
- American Style: American style options can be exercised any time until expiry.
- European Style: European style options can only be exercised on expiry (not before).
- Exercise & Assignment
- Exercise is when the option holder decides to use the option to buy or sell the underlying stock at the strike price. Assignment is when an option writer is required to buy or sell the underlying stock due to the obligation from writing the option. An option holder exercising an option will cause an option writer to be assigned.
- Holder
- The holder is the person who bought an option contract. Someone who buys an option they previously wrote is not a holder, they are just closing an existing position. An option holder is said to be "long" the option they bought.
- In-the-Money
- Call options: The underlying stock price is above the option strike price.
Put options: The underlying stock price is below the option strike price.
(Options with intrinsic value are in-the-money.)- Intrinsic Value
- The portion of an options premium that is attributed to the value that could currently be realized by exercising and simultaneously closing out the position in the open market.
- Long
- If you own a security you are said to be long that security.
- Out-of-the-Money
- Call options: The underlying stock price is below the option strike price.
Put options: The underlying stock price is above the option strike price.- Physical Settlement
- Options that have physical settlement are settled by delivery of and payment for the underlying asset.
- Premium
- A premium is the price that is paid for an option contract.
- Put Option
- A contract that gives the holder the right to sell the underlying for the strike price any time until expiry.
- Sell to Close
- Selling a contract that you currently own.
- Short
- If you sell a security that you didn't already own you are said to be short that security.
- Time Value
- The portion of an options premium that is attributed to the option may gain value in the remaining time before it expires.
- Strike Price (Exercise Price)
- The price that the underlying asset will be bought or sold at if an option contract is exercised.
- The portion of an options premium that is attributed to the option may gain value in the remaining time before it expires.
- Uncovered (Naked) Writing
- Selling an option when you don't have a position that could be used to fulfill the obligation of the option. Naked call writing carries unlimited risk, while naked put writing is limited to the strike price of the option.
- Underlying
- The underlying is something which an option contract is based on. This could be a stock, index, foreign currency, interest rate, or a futures contract. The underlying is commonly referred to as the: underlying interest, underlying asset, underlying security, or the underlying stock.
- Writer
- A writer is someone who sold an option contract to open a position. The writer is the person who is taking on the risk, (underwriting the risk). Someone who sells an options contract they already own is not a writer, they are just closing an existing position. An option writer is said to be "short" the option they wrote.
- Write (Sell to Open)
- Selling an options contract that you don't already own. The writer is the person taking on the risk, (underwriting the risk). Someone who sells an options contract they already own is not a writer, they are just closing an existing position. An option writer is said to be "short" the option they wrote.
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