General Theory - General Options Terminology

General Options Terminology
Futures are very similar in many respects to options, as discussed earlier in this chapter. It's not surprising, then, that futures traders need to know some terms that are borrowed from the options world. This is especially true considering how often futures contracts serve as the commodities underlying options.

As in the preceding General Futures Terminology section, we provide only brief definitions here, to be expanded upon in later chapters.

Definitions
At-the-Money: The point at which an option's strike price is the same as the current trading price of the underlying commodity.

Call: An option contract giving the buyer the right, but not the obligation, to purchase a commodity or other asset or to enter into a long futures position.

Conversion: A position created by selling a call option, buying a put option and buying the underlying instrument (for example, a futures contract), where the options have the same strike price and the same expiration.

Delta: The expected change in an option's price, given a one-unit change in the price of the underlying futures contract or physical commodity.

Exercise: To elect to buy or sell, taking advantage of the right conferred to the owner of an option contract.

Expiration: The date on which an option contract automatically expires; the last day an option may be exercised.

Grantor: The maker, writer, seller or issuer of an option contract who, in return for the premium paid for the option, stands ready to purchase the underlying commodity (or futures contract) in the case of a put option, or to sell the underlying commodity (or futures contract) in the case of a call option.

In-The-Money: The state of an option contract in which it has a positive value if exercised.

Intrinsic Value: A measure of the value of an option if immediately exercised; the extent to which it is in-the-money.

Out-Of-The-Money: The state of an option contract in which it has no intrinsic value.

Premium: The payment an option buyer makes to the option writer for granting an option contract. (Note: "Premium" also has the meaning defined above as the amount a price would be increased to purchase a better quality commodity.)

Put: An option contract that gives the holder the right, but not the obligation, to sell a specified quantity of a particular commodity or other interest at a given, prior to or on a future date.
Spread: The purchase of one futures delivery month against the sale of another futures delivery month of the same commodity.

Straddle: The purchase of one delivery month of one commodity against the sale of that same delivery month of a different commodity.

Strangle: An option position consisting of the purchase of put and call options having the same expiration date, but different strike prices.

Synthetic Futures: A position that mimics a futures contract that is created by combining call and put options.

Time Value: That portion of an option's premium that exceeds the intrinsic value, reflecting the probability that the option will move into-the-money.

Writer: The issuer, grantor or seller of an option contract.


Summary And Review
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