Contracts. Calls. Puts. Premium. Strike Price. Intrinsic Value. Time Value. In, out of and at the money. This is the language of option traders. First of all, being conversant involves knowing several primary words.





Sometime the technical jargon associated with option trading will make it look daunting. That's why we decided to create option trading terminology cheat sheet to help you keep of it all. Here are the basics for beginning investors to trade options.





In-The-Money (ITM)

Term used when the strike price of an option is less than the price of the underlying for a call option, or greater than the price of the underlying for a put option.



At-The-Money (ATM)

An at the money option is one whose strike price is equal to the current price of the underlying asset.



Out-Of-The-Money (OTM)

An out of the money option is one whose strike prices is unfavorable in comparison of the current price of the underlying. This means when the strike price of a call is greater than the price of the underlying asset.



Ask, Asked Price

This is the price at which the trader is willing to sell and option or security.



Assignment

The requirement an option writer has go to deliver the underlying asset at the precise and time. If it's a call, the writer must sell the buyer the underlying asset at the precise strike involved within the contract. If it's a put,writer must buy from the buyer the asset at a selected strike price involved in contract.



Bid, Bid Price

This is the price that the trader is willing to buy an option or security.



Bid, Ask Spread

The difference between the bid and ask prices of a security. The wider spread is, the less liquid market and the greater slippage.



Call

The option contract conveys the right to buy a standard quality of a specified asset at a fixed price per unit.



Contract Size

The number of units of an underlying specified in contract. In futures options, the contract size is one futures contract, The contract size is an amount of cash equal to parity time multiplier. In the case of currency options it varies.



Credit

The amount of cash you receive for writing an option. This is the maximum amount that you can make on a trade, it is also known as selling a option naked.



Debit

The amount you pay for buying an option, it is your maximum risk.



Exercise

The act by which the holder of an option exercises his right to buy or sell the underlying asset at the designated strike price.



Exercise Price

The price at which the owner of call option can buy the underlying asset. See strike price.



Expiration, Expiration Date, Expiration Month

This is the price date by which option contract must be exercised or it becomes void and the holder of the option ceases to have any rights under the contract.



Extrinsic Value

The opposite intrinsic value, it is the premium that is an option at any strike.



Greeks

The Greek letters to described various measures of the sensitivity of the value of an options with respect different factors. They include Delta, Gamma, Theta, Rho and Vega.



Delta

Measures the rate of change in an option, calls have positive deltas and puts have negative deltas.



Gamma

GAMMA expresses how fast delta changes with one-point increase in the price of the underlying.



Theta

The sensitivity of value of an option with respect to the time remaining to expiration. It is the daily drop value of an option due to the time effect.



Vega

A measure of the sensitivity of the value of an option at a particular point in time to changes in volatility.



Rho

The change in the value of an option with respect to a unit change in the risk free rate.





Historical Volatility

Historically volatility is a measurement of the actual observed volatility of a specific stock over a given period of time in the past, such as a month, quarter or year.



Implied Volatility (IV)

This is the volatility that the underlying would need to have for the pricing model to produce the same theoretical option price as the actual option price.



Intrinsic Value

The value of the current market price minus the strike price, if the current price is less than the strike price for a call it has no intrinsic value, and vice versa for a put.



Open Interest

The cumulative total of all option contracts of a particular series sold, but not yet repurchased.



Option Chain

The list of available options for a given underlying asset.



Premium

This is the price of an option contract over the intrinsic value.



Put

This option contract convey the right to sell a standard quality of a specified asset at a fixed price per unit.



Strike Price

The price at which the holder of an option has the right to buy or sell the underlying.



Time Decay

Term used to described how the theoretical value of an option "erodes" or reduce with the passage of time.



Write, Writer

To sell an options that is not owned through an opening sale transactions. While this positions remains open, the writer is obligated to fulfill the terms of that contract if the option is assigned.



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