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Options Glossary

The Financial world has developed a special investment based language to help describe the options market. Often at times one is confronted with a term which is totally alien to them, or has a completely different meaning from what one thought. Misunderstanding these terms can sometimes lead to the wrong conclusion, and that can cost you money!

Assignment - The receipt of an Exercise notice by an options writer that requires the writer to Sell (in the case of a call) or Purchase (in the case of a put) the Underlying security at the specified strike price.

At-the-money - An option is at the Money if the strike price of the option is equal to the Market price of the Underlying security. For example, if xyz Stock is Trading at 54, then the xyz 54 option is at the money.

Buy-Write Transaction - The simultaneous purchase of 100 shares of stock and sell of one call option.

Call - This is a Contract that gives the holder the Right to Buy a certain quantity (usually 100 shares) of an Underlying security from the writer of the option, at a specified price (the strike price) Up to a specified date (the Expiration date). An option that gives the holder the right to buy the underlying futures contract.

Chicago Board Options Exchange (CBOE) - A securities Exchange created in the early 1970s for The Public trading of standardized option contracts. Primary Place stock options, foreign Currency options, and index options (S&P 100, 500, and OTC 250 index)

Covered call - A short Call option position in which the writer owns the number of Shares of the underlying Stock represented by the option contracts. Covered calls generally limit the Risk the writer takes because the stock does not have to be bought at the Market price, if the holder of that option decides to Exercise it.

Covered call writing strategy - A Strategy that involves writing a Call option On securities that the Investor owns. See: Covered or Hedge option strategies.

Covered option - Option position that is Offset by an equal and opposite position in the Underlying security. Antithesis of naked option.

Exercise - The Right granted under the terms of a listed options contract. Call holders Exercise their right to Buy the Underlying security. Put holders exercise their right to Sell the underlying security. There is generally an Exercise limit placed by the options exchange. This is to prevent a group of investors or an individual Investor from Cornering the market on an underlying security. o implement the right of the holder of an option to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise notice - A broker's notification a client want to Exercise a Right to Buy or Sell (depending On the Type of contract) the Underlying security of the option contract.

Expiration - The date, after which, the option is no longer a valid contract.

Expiration date - The last day (in the case of American-style) or the only day (in the case of European-style) On which an option may be exercised. For Stock options, this date is the Saturday immediately following the third Friday of the Expiration month; brokerage firms may set an earlier deadline for notification of an option holder's intention to exercise. If Friday is a holiday, the Last trading day will be the preceding Thursday.

In-the-money option - An option that has value. A call option with a strike price lower then the price of the underlying security, or a put option with a strike price higher then the price of the underlying security.

Leaps - Term Equity Anticipation Securities. Currently, these are long Term  put and call options with January expirations Up to 2-1/2 years.

Long position - Owning or holding options (i.e., the number of contracts bought exceeds the number of contracts sold). For equities, a Long position occurs when an individual owns securities. An owner of 1,000 Shares of Stock is said to be "Long the stock."

Margin account - A leverageable Account in which stocks can be purchased for a Combination of Cash and a loan. The Loan in the margin account is collateralized by the stock; if the value of the Stock drops sufficiently, the owner will be asked to either put in more cash, or Sell a portion of the stock. Margin rules are federally regulated, but margin requirements And interest may vary among broker/dealers.

Margin requirement (options)  - The amount of Cash an uncovered (naked) option writer is required to deposit and maintain to Cover his daily position Valuation and reasonably foreseeable Intraday price changes.

Naked option strategies - An unhedged Strategy making Exclusive use of one of the following: Short Call strategy (selling or writing call options), and Short put strategy (selling or writing put options). By themselves, these positions are called Naked strategies because they do not involve an offsetting or risk-reducing position in another option or the Underlying security. Related: Covered option strategies. Antithesis of covered option.

Obligation - A LEGAL responsibility, such as to repay a debt.  Attributes forsed upon the seller of an option.

Option (Options contract) - A contract that gives its owner the right but not the obligation, to earthier buy or sell specified underlying assets at specified price for a specified period of time.

Option spread - The Trading of options of the same Class at the same time in Order to Profit from changes in the Size of the spread between different options.

Out-of-the-Money - A Call option whose strike price is higher than the Market price of the Underlying security, or a put option whose strike price is lower than the Market price of the underlying security.

Option premium - The option price.

Put option - An option contract that gives its owner the right but not the obligation to sell the underlying assets at the strike price for a specified time.

Put Call Ratio - The Ratio of the volume of put options traded to the volume of Call options traded, which is used as an indicator of Investor sentiment (bullish or bearish).

Put-call parity relationship - The relationship between the price of a put and the price of a Call on the same Underlying security with the same Expiration date, which prevents Arbitrage opportunities. Holding the underlying Stock and buying a put will Deliver the exact payoff as buying one call and investing the Present value (PV) of the Exercise price. The call value equals C = S + P - PV(k).

Short - One who has sold a Contract to establish a Market position and who has not yet Closed out this position through an offsetting purchase; the opposite of a long position.

Stock index option - An option in which the Underlying is a Common stock index.

Stock option - An option whose underlying Asset is the Common stock of a corporation.

Strike index - For a Stock index option, the index value at which the buyer of the option can Buy or Sell the Underlying stock index. The Strike index is converted to a dollar value by multiplying by the option's Contract multiple.

Striking price - The price at which an option can be exercised.

Time spread strategy  - Buying and selling puts and calls with the same Exercise price but different Expiration dates, and trying to Profit from the different premiums of the options.

Time until expiration - The time remaining until a financial Contract expires. Also called time to maturity. 

Time value of an option - The portion of an option's premium that is based On the amount of time remaining until the Expiration date of the option contract, and the idea that the Underlying components that determine the value of the option may change during that time. Time value is generally equal to the difference between the premium and the intrinsic value.

Uncovered call - A short Call option position in which the writer does not own Shares of underlying Stock represented by the option contracts. Uncovered calls are much riskier for the writer than a Covered call, where the writer of the Uncovered call owns the Underlying stock. If the buyer of a call exercises the option to call, the writer would be forced to Buy the Asset at the current Market price. Also called a "naked" asset.

Uncovered put - A Short put option position in which the writer does not have a corresponding short Stock position or has not deposited, in a Cash account, cash or cash equivalents equal to the Exercise value of the put. The writer has pledged to Buy the Asset at a certain price if the buyer of the option chooses to exercise it. Uncovered put options limit the writer's Risk to the value of the stock (adjusted for premium received.) Also called "naked" puts.

Underlying asset - The security or property or Loan agreement that an option gives the Option holder the Right to Buy or to sell.

Volatility risk - The Risk in the value of options portfolios due to the unpredictable changes in the volatility of the Underlying asset.

Write call - Sell a call when owning the underlying stock.

 

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