But here we present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides. At-the-money An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price. Back month For an option spread involving two expiration months, the terms of options that is farther away in time. Break-even point An underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration.
Call option An equity terms of options that gives its buyer the right to buy shares of the underlying stock at the strike price per share at any time before it expires. The call seller or writeron the other hand, has the obligation to sell shares at the strike price if called upon to do so. Cash settlement top A settlement style that is generally characteristic of index options.
Instead of stock changing hands after a call or put is exercised physical settlementcash changes hands. Closing transaction A transaction that eliminates or reduces an open option position.
A closing sell transaction eliminates or reduces a long position. A closing buy transaction eliminates or reduces a short position.
Commission The fee charged by a brokerage firm for its services in the execution of a stock or option order on a securities exchange. Credit transaction top Any cash received in an account from the sale of an option or stock position.
With a complex strategy involving multiple parts legsa net credit transaction is one in which the total cash terms of options received is greater than the total cash amount paid.
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Debit transaction Any cash paid out of an account for the purchase of an option or stock position. With a complex strategy involving multiple parts legsa net debit transaction is one in which the total cash amount paid is greater than the total cash amount received.
This is a feature of American-style options that may be exercised or assigned at any time before they expire. Equity option top A contract that gives its buyer owner the right, but not the obligation, to either buy or sell shares of a specific underlying stock or exchange-traded fund ETF at a specific price strike or exercise price terms of options share, at any time before the contract expires.
Even money transaction With a complex strategy involving multiple parts legsan even money transaction results when the total cash amount received is the same as the total cash amount paid. Exchange traded fund ETF top A security that represents shares of ownership in a fund or investment trust that holds a basket collection of specific component stocks.
Find out which stocks you should buy this month to make money in this bullish market. Get My Report Options Trading Terminology Call Option A call option gives the buyer the right to buy shares at a fixed price strike price before a specified date expiration date. Likewise, the seller writer of a call option is obligated to sell the stock at the strike price if the option is exercised. Put Option A put option gives the buyer the right to sell shares at a fixed price strike price before a specified date expiration date. Likewise, the seller writer of a put option is obligated to purchase the stock at the strike price if exercised.
ETF shares are listed and traded on securities exchanges just like stock, and so may be bought and sold throughout the trading day. If you buy stock before the ex-dividend date, you will be eligible to receive the upcoming dividend payment.
Options Trading Glossary of Terms
If you buy stock on the ex-date or afterwards, you will not receive the dividend. Exercise top To employ the rights an equity option contract conveys to its buyer to either buy in the case of a call or sell in the case of a put shares of the underlying security at the strike terms of options per share at any time before the contract expires.
Exercise price A term of any equity option contract, it is the price per share at which shares of stock will change hands after an option is exercised or assigned. For equity options, this is the Saturday following the third Friday of the expiration month.
Options Spreads What Is an Option? Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset. Unlike futuresthe holder is not required to buy or sell the asset if they choose not to. Call options allow the holder to buy the asset at a stated price within a specific timeframe.
The last day on which expiring equity options trade and may be exercised is the business day prior to the expiration date, or generally the third Friday of the month. Expiration month The calendar month during which a specific expiration date occurs. If the option is out-of-the-money, the extrinsic value is equal to the entire premium.
Historical volatility 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 for any option can only be determined via an option pricing model.
In-the-money An equity call contract is in-the-money when its strike price is less than the current underlying stock price. An equity put contract is in-the-money when its strike price is greater than the current underlying stock price.
Equity Terms of options calls and puts can have expirations up to three years into the future and expire in January of their expiration years. Lognormal distribution top With respect to stock prices over a period of time, a lognormal distribution of daily price changes represents not the actual dollar amount of each change, but terms of options the logarithms of each change.
Options Trading Terminology
So in a sense a lognormal distribution could be considered to have a bullish bias. Long option A position resulting from the opening purchase of a call or put contract and held owned in a brokerage account.
Long stock Shares of stock that are purchased and held in a brokerage account and which represent an equity interest in the company that issued the shares. MEAN top For a data set, the mean is the sum of the observations divided by the number of observations.
The mean is often quoted along with the standard deviation: the mean describes the central location of the data, and the standard deviation describes the range of possible occurrences.
Normal distribution One of the most familiar mathematical distributions, it is a set of random observed numbers or closing stock prices whose distribution is symmetrical around the mean or average number. Since this a symmetrical distribution, when the numbers represent daily stock price changes, for every possible change to the upside there must be an equal price change to the downside.
- It simply explains the intrinsic value i.
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The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to the upside, but in the real world a stock can only decline to zero.
Options Trading Definitions – Must Know Terms for Beginners
An opening buy transaction creates or increases terms of options long position; an opening sell transaction creates or increases a short position also known as writing. Generated by an option pricing model are the option Greeks : delta, gamma, theta, vega and rho.
Out-of-the-money An equity call option is out-of-the-money when its strike price is greater than the current underlying stock price. An equity put option is out-of-the-money when its strike price is less than the current underlying stock price. Physical settlement The settlement style of all equity options in which shares of underlying stock change hands when an option is exercised.
Premium top The price paid or received for an option alert for binary options the marketplace.
Equity option premiums are quoted on a price-per-share basis, so the total premium amount paid by the buyer to the seller in any option transaction is equal to the quoted amount times underlying shares. Option premium consists of intrinsic value if any plus time value. Put option top An equity option that gives its buyer the right to sell shares of the underlying stock at the strike price per share at any time before it expires.
- Links to non-Ally websites The technical jargon associated with option trading can often make it seem intimidating.
- Just keep forging ahead, and everything will become more apparent over time.
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