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

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 exercised 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

Related Articles
  1. Trading

    Trading Options on Futures Contracts

    Futures contracts are available for all sorts of financial products, from equity indexes to precious metals. Trading options based on futures means buying call or put options based on the direction ...
  2. Trading

    Options Strategies for Your Portfolio to Make Money Regularly

    Discover the option-writing strategies that can deliver consistent income, including the use of put options instead of limit orders, and maximizing premiums.
  3. Trading

    Three Ways to Profit Using Put Options

    A brief overview of how to profit from using put options in your portfolio.
  4. Trading

    A Guide Of Option Trading Strategies For Beginners

    Options offer alternative strategies for investors to profit from trading underlying securities, provided the beginner understands the pros and cons.
  5. Trading

    What Is Option Moneyness?

    Get the basics under your cap before you get into the game.
  6. Trading

    How to Make Money by Trading Index Options

    Index options are less volatile and more liquid than regular options. Understand how to trade index options with this simple introduction.
  7. Trading

    Getting Started In Forex Options

    Stocks are not the only securities underlying options. Learn how to use FOREX options for profit and hedging.
Frequently Asked Questions
  1. What is the difference between yield and return?

    While both terms are often used to describe the performance of an investment, yield and return are not one and the same ...
  2. What are the Differences Among a Real Estate Agent, a broker and a Realtor?

    Learn how agents, realtors, and brokers are often considered the same, but in reality, these real estate positions have different ...
  3. What is the difference between amortization and depreciation?

    Because very few assets last forever, one of the main principles of accrual accounting requires that an asset's cost be proportionally ...
  4. Which is better, a fixed or variable rate loan?

    A variable interest rate loan is a loan in which the interest rate charged on the outstanding balance varies as market interest ...
Trading Center