Below is some common options trading terminology:
- A call option – a call option gives you the right (but not the obligation) to buy an asset at a specific price. Call options are used if you believe an asset’s price will rise.
- A put option – a put option gives you the right (but not the obligation) to sell an asset at a specific price. Put options are used if you think an asset’s price will fall.
- Expiration date – the date on which the options contract expires or becomes void.
- Strike price – also known as the “exercise price”, this is the price at which you can buy or sell the stock (or underlying asset) if you choose to exercise the option.
- Premium – the option’s price.
- Bid – the price a buyer is willing to pay for the option.
- Ask – the price a seller is willing to accept for the option.
- Breakeven price – the price in the underlying asset at which an investor can choose to exercise or dispose of the contract without incurring a loss.
- Intrinsic value - The difference between the underlying asset's current price and the strike price at which the option can be exercised.
- Extrinsic value – The difference between the option’s market price (premium) and its intrinsic value. Factors like time to expiration and market volatility can impact the extrinsic value.
- In-the-money (ITM) – when the option has a positive value if exercised.
- Out-of-the-money (OTM) – when the option lacks intrinsic value.
- At-the-money (ATM) - the asset price equals the strike price.
- Time decay - a measure of the rate of change in the value of an options contract as it nears the expiration date. The more time left until the expiration date, the slower the time decay. The opposite is also true; the closer , the more time decay increases. Options may lose value rapidly, which highlights the importance of timing in trades.
- “The Greeks” – these are risk measures that help to indicate how sensitive an option is to various factors:
- Delta – A measure of an option’s price change relative to the underlying asset. A call option has a positive delta; a put option has a negative delta. The higher the delta, the more the option price will move with the underlying price.
- Gamma – A measure of the rate of change of the option’s delta.
- Theta – A measure of impact in time remaining (as the expiration date approaches).
- Vega – A measure of the option’s sensitivity to volatility of the underlying asset.
- Option Exercise - Option buyers can exercise (use) their rights to either buy or sell shares of the underlying asset. When the buyer exercises this right, the writer of the option is assigned.
- Option Assignment - The writer who has been assigned has the obligation to either buy or sell shares of the underlying asset to/from the buyer of the option contract.