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Options Terminology

All these terms that are easily found on google. We complied them in one area so you do not have to look them up! Courtesy of Investopedia and the Black Book by Jeff Bishop @Ragingbull.

Put – The right, but not the obligation to sell the underlying at a specific price by a specific date.

Call – The right, but not the obligation to buy the underlying at a specific price by a specific date.

Contract – The basic unit of an option.  For stock options it is the right to buy or sell 100 shares of the underlying security. Buying 1 contract gives you the right to control 100 shares of stock.

Long – To buy, or own, a contract.  Also known as holding.

Short – To sell a contract.  Also known as writing.

Underlying – The instrument on which the contract is based.  It could be a stock, an index, or an ETF. If you buy an option on AAPL stock, then AAPL is considered the “underlying”.

Strike – The price at which an option’s contract gives the holder the right to buy or sell the underlying.

Exercise – This one has two meanings.  It’s the same as strike, but it is also the act of making good on an option.  For a call, exercise means to buy the underlying.  For a put, exercise means to sell the underlying.

Premium – The amount of money it costs (when buying an option) or collecting (when selling an option). For example, if you buy an option for $1.00, the total would be ($1.00 x 100) $100.

Intrinsic Value – This is the inherent value of an option.  It’s calculated by subtracting the strike price from the current price of the underlying.  An option only has intrinsic value when it is in-the-money.                                                                                                                                       

Extrinsic Value – This is the value of an option over and above its intrinsic value.  It’s also known as time value.

In-the-money (ITM) –  An option that has intrinsic value.

At-the-money (ATM) – This happens when the strike and the market price of the underlying are the same. At-the-money options consist of time value only.

Out-of-the-money (OTM) – A call is OTM when its strike is higher than the current market value of the underlying.  A put is OTM when its strike is lower than the current market value of the underlying. These options only have time value.

Expiration – The date on which the option contract ceases to exist.

The Greeks –They measure the different factors that affect the price of an option. We’ll go over these in further detail as the course progresses.

Holder – The buyer, or owner of an option.

Writer – The seller of an option.

Hedge – A strategy that attempts to protect a position. Think of it like you would as an insurance policy.

Historical Volatility – Measures dispersion of returns around the mean.

Implied Volatility – The market’s “guess” on future volatility.  It’s based on supply and demand.

Synthetic – Using options to create the risk/reward profile of a stock position.

Buy / Write – Simultaneously buying a stock and writing a call against it.

Assignment – If an option expires at least one penny in-the-money at expiration, the holder of those options will be assigned 100 shares for every option that they have. The option buyer has the right to take assignment at any time prior to expiration. The option seller can be obligated to assignment at any time.

Front Month – The nearest term (monthly) option contract.

Calendar Spread – Also known as a time spread.  An option strategy created by buying and selling two of the same type of option on the same underlying at the same strike price with expiration in two different months.

Class – The set of all of a given type of option; either puts or calls.

Long Vertical Spread – An option strategy created by simultaneously buying and selling a similar option on the same underlying with the same expiration but using different strike prices.

Long Straddle – An option strategy created by buying one at-the-money put and one at-the-money call on the same underlying, expiring in the same month.

Long Strangle – An option strategy created by buying one out-of-the-money put and one out-of-the-money call on the same underlying, expiring in the same month.

Butterfly Spread – An option strategy created by combining two vertical spreads on the same underling.  One spread will be long, the other will be short.

Credit – The amount of premium received when selling an option.

Debit – The amount of premium paid when buying an option.

Near-term – An options contract that expires 1 to 3 months out.

Mid-term – An options contract that expires 4 to 6 months out.

Far-term – An options contract that expires 7 to 12 months out.

LEAPS – An options contract that expires further out than one year.  The acronym comes from Long-term Equity Anticipation Securities.