Options Pricing: A Review Of Basic Terms
AAA
  1. Options Pricing: Introduction
  2. Options Pricing: A Review Of Basic Terms
  3. Options Pricing: The Basics Of Pricing
  4. Options Pricing: Intrinsic Value And Time Value
  5. Options Pricing: Factors That Influence Option Price
  6. Options Pricing: Distinguishing Between Option Premiums And Theoretical Value
  7. Options Pricing: Modeling
  8. Options Pricing: Black-Scholes Model
  9. Options Pricing: Cox-Rubenstein Binomial Option Pricing Model
  10. Options Pricing: Put/Call Parity
  11. Options Pricing: Profit And Loss Diagrams
  12. Options Pricing: The Greeks
  13. Options Pricing: Conclusion
Options Pricing: A Review Of Basic Terms

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 exchange-traded options are American.

At-the-Money - 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 share-for-share basis.

Covered Put - An option in which the writer of a put option holds a short position in the underlying security on a share-for-share 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 American-style 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.

In-the-Money - An option that has an intrinsic value. A call option is considered in-the-money if the underlying security is higher than the strike price.

LEAPS (Long-term 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 agreed-upon price (the strike price) on or before a specified date.

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

Over-the-Counter - An option that is not traded over an exchange. An over-the-counter 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 agreed-upon 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.

Options Pricing: The Basics Of Pricing

  1. Options Pricing: Introduction
  2. Options Pricing: A Review Of Basic Terms
  3. Options Pricing: The Basics Of Pricing
  4. Options Pricing: Intrinsic Value And Time Value
  5. Options Pricing: Factors That Influence Option Price
  6. Options Pricing: Distinguishing Between Option Premiums And Theoretical Value
  7. Options Pricing: Modeling
  8. Options Pricing: Black-Scholes Model
  9. Options Pricing: Cox-Rubenstein Binomial Option Pricing Model
  10. Options Pricing: Put/Call Parity
  11. Options Pricing: Profit And Loss Diagrams
  12. Options Pricing: The Greeks
  13. Options Pricing: Conclusion
Options Pricing: A Review Of Basic Terms
RELATED TERMS
  1. Bid Wanted

    An announcement by an investor who holds a security that he or ...
  2. Multibank Holding Company

    A company that owns or controls two or more banks. Mutlibank ...
  3. Short Put

    A type of strategy regarding a put option, which is a contract ...
  4. Wingspread

    To maximize potential returns for certain levels of risk (while ...
  5. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  6. Nadex

    Nadex stands for the North American Derivatives Exchange, a regulated ...
  1. Is the Dow Jones a stock exchange?

    Learn about the Dow Jones Industrial Average and its impact. This historically significant index provides a daily snapshot ...
  2. Is the Dow Jones a public company?

    Find out how the Dow Jones Industrial Average tracks the health of the U.S. economy. This fluctuating number indicates the ...
  3. What are the differences between investing in real estate and stocks?

    Invest in real estate by purchasing physical property or buildings, or invest in stocks by buying a claim to a company and ...
  4. When can you trade the stocks in the Dow Jones Industrial Average (DJIA)?

    Find out when you can trade shares linked to the Dow Jones Industrial Average during NYSE and Nasdaq trading sessions.
comments powered by Disqus
Related Tutorials
  1. Investing For Safety and Income Tutorial
    Bonds & Fixed Income

    Investing For Safety and Income Tutorial

  2. American Depositary Receipt Basics
    Economics

    American Depositary Receipt Basics

  3. Stock Basics Tutorial
    Investing Basics

    Stock Basics Tutorial

  4. Binary Options Tutorial
    Options & Futures

    Binary Options Tutorial

  5. Top ETFs And What They Track: A Tutorial
    Mutual Funds & ETFs

    Top ETFs And What They Track: A Tutorial

Trading Center