Options Pricing: A Review Of Basic Terms
The following is intended as a review of basic option terminology, which can be used as a reference as needed:
American Options  An option that can be at any point during the life of the contract. Most exchangetraded options are American.
AttheMoney  An option whose strike price is equal to the market price of the underlying security.
Call  An option that gives the holder the right to buy the underlying security at a particular price for a specified, fixed period of time.
Contract  An option that represents 100 shares of an underlying stock.
Covered Call  An option strategy in which the writer of a call option holds a long position in the underlying security on a shareforshare basis.
Covered Put  An option in which the writer of a put option holds a short position in the underlying security on a shareforshare basis.
Covered Writer  An option seller who owns the option's underlying security as a hedge against the option.
Derivative  An investment product that derives its value from an underlying asset. Options are derivatives.
Early Exercise  The exercise of an option before its expiration date. Early exercise can occur with Americanstyle options.
European Options  An option that can only be exercised during a particular time period just before its expiration.
Date  The date that an option becomes void. For listed stock options, it is the Saturday following the third Friday of the expiration month.
Holder  An investor who purchases an option and who makes a premium payment to the writer.
IntheMoney  An option that has an intrinsic value. A call option is considered inthemoney if the underlying security is higher than the strike price.
LEAPS (Longterm Equity Anticipation Securities)  LEAPS are publicly traded options that have expiration dates longer than one year.
Listed Option  A put or call option that is traded on an options exchange. The terms of the option, including strike price and expiration dates, are standardized by the exchange.
Naked Option  An option position in which the writer of the option does not have an offsetting position in the underlying security, thereby having no protection against adverse prices moves.
Open Interest  The total number of outstanding option contracts in the exchange market on a particular day.
Option  A financial derivative that gives the holder the right, but not the obligation, to either buy or sell a fixed amount of a security or other financial asset at an agreedupon price (the strike price) on or before a specified date.
OutoftheMoney  An option with no intrinsic value that would be worthless if it expired on that day. A call option is outofthemoney when the strike price is higher than the market price of the underlying security. A put option is outofthemoney when the strike price is lower than the market price of the underlying security.
OvertheCounter  An option that is not traded over an exchange. An overthecounter option is not subjected to the standardization of terms such as strike prices and expiration dates.
Premium  The total cost of the option. An option holder pays a premium to the option writer in exchange for the right, but not the obligation, to exercise the option. In general, the option's premium is its intrinsic value combined with its time value.
Put  An option that gives the holder the right to sell the underlying security at a particular price for a specified, fixed period of time.
Strike Price  The agreedupon price at which an option can be exercised. The strike price for a call option is the price at which the security can be bought (prior to the expiration date); the strike price for a put option is the price at which the security can be sold (before the expiration date). The strike price is sometimes called the exercise price.
Terms  The collective conditions of an options contract that denote the strike price, expiration date and the underlying security.
Underlying Security  The security that is subject to being bought or sold upon the exercise of an option.
Writer  An investor who sells an option and who collects the premium payment from the buyer. Writers are obligated to buy or sell if the holder chooses to exercise the option.

Strike Width
The difference between the strike price of an option and the ... 
Inverse Transaction
A transaction that can cancel out a forward contract that has ... 
Reference Equity
The underlying equity that an investor is seeking price movement ... 
Boundary Conditions
The maximum and minimum values used to indicate where the price ... 
BjerksundStensland Model
A closedform option pricing model used to calculate the price ... 
DeltaGamma Hedging
An options hedging strategy that combines a delta hedge and a ...

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