Options
Options are contracts that related to stock buys and sells. Options are a higher risk investment than stock and bonds, so you need to get educated about them before investing.
References
Glossary
American-Style option
An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.
Assignment
The receipt of an exercise notice by an option writer (seller) that obligates him 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.
Call
An Option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.
Capped-style option
A capped option is an option with an established profit cap or cap price. The cap price is equal to the option’s strike price plus a cap interval for a call option or the strike price minus a cap interval for a put option. A capped option is automatically exercised when the underlying security closes at or above (for a call) or at or below (for a put) the Option’s cap price.
Class of options
Option contracts of the same type (call or put) and Style (American, European or Capped) that cover the same underlying security.
Closing purchase
A transaction in which the purchaser’s intention is to reduce or eliminate a short position in a given series of options.
Closing sale
A transaction in which the seller’s intention is to reduce or eliminate a long position in a given series of options
Covered call option writing
A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security or strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.
Derivative security
A financial security whose value is determined in part from the value and characteristics of another security, the underlying security.
Equity options
Options on shares of an individual common stock.
European-style options
An option contract that may be exercised only during a specified period of time just prior to its expiration.
Exercise
To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.
Exercise price
See Strike price.
Exercise settlement amount
The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.
Expiration cycle
An expiration cycle relates to the dates on which options on a particular underlying security expire. A given option, other than LEAPS®, will be assigned to one of three cycles, the January cycle, the February cycle or the March cycle.
Expiration date
Date on which an option and the right to exercise it, cease to exist.
Expiration time
The time of day by which all exercise notices must be received on the expiration date.
Hedge
A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.
Holder
The purchaser of an option.
In-the-money
A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.
Intrinsic value
The amount by which an option is in-the-money (see above definition).
LEAPS®
Long-term Equity Anticipation Securities, or LEAPS®, are long-term stock or index options. LEAPS®, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.
Long position
A position wherein an investor’s interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).
Margin requirement (for options)
The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.
Naked writer
See Uncovered call writing and Uncovered put writing.
Opening purchase
A transaction in which the purchaser’s intention is to create or increase a long position in a given series of options.
Opening sale
A transaction in which the seller’s intention is to create or increase a short position in a given series of options.
Open interest
The number of outstanding option contracts in the exchange market or in a particular class or series.
Out-of-the-money
A call option is out-of-the-money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.
Put
An option contract that gives the holder the right to sell the underlying security at a specified price for a certain fixed period of time.
Secondary market
A market that provides for the purchase or sale of previously sold or bought options through closing transactions.
Series
All option contracts of the same class that also have the same unit of trade, expiration date and strike price.
Short position
A position wherein a person’s interest in a particular series of options is as a net writer (i.e., the number of contracts sold exceeds the number of contracts bought).
Strike price
The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put by the option holder upon exercise of the option contract.
Time value
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.
Type
The classification of an option contract as either a put or a call.
Uncovered call writing
A short call option position in which the writer does not own an equivalent position in the underlying security represented by his option contracts.
Uncovered put writing
A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.
Underlying security
The security subject to being purchased or sold upon exercise of the option contract.
Volatility
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.
Writer
The seller of an option contract.