Dear Moneybol readers, I was trying to find something related to nifty options trading today and was looking for the meaning of a particular word related to options trading. This is when I realized that moneybol should have something which explores different terms related to this complex and coveted field in finance. So here is a glossary of terms related to “Options”. This will tell you in brief about various terms commonly used by users. In case you need detailed explanation about any of these terms, inform me through comments on this post and I will try to give you the best possible explanation.

Thanks and happy reading

ASSIGNMENT – Notice to an option writer that an option has been exercised by the option holder.

AT-THE-MONEY – An option whose strike price is equal – or approximately equal – to the current market price of the underlying

BEAR SPREAD – A spread which is put on with the expectation that futures prices will decline.

BULL SPREAD – A spread which is put on with the expectation that futures prices will rise.

BUYER – The purchaser of an option, either a call option or a put option. Also referred to as the option holder.

CALL OPTION – An option which gives the option buyer the right to purchase (go “long”) the underlying futures contract

CLASS OF OPTIONS – All call options – or all put options – on the same underlying futures contract.

CLEARING CORPORATION – The Board of Trade Clearing Corporation, whose function it is to clear (match) all purchases and

CLOSING TRANSACTION – A purchase or sale that liquidates -offsets – an existing position. That is, selling an option that

COMBINATION – A position created either by purchasing both a put and a call or by writing both a put and a call on the same

COVERED OPTION – An option written against an opposite position in soybean futures.

CREDIT SPREAD – A spread in which the value of the option sold exceeds the value of the option purchased.

DEBIT SPREAD – A spread in which the value of the option purchased exceeds the value of the option sold.

DELTA – The amount by which an option’s price will change for a unit change in the underlying futures price. With the

EXERCISE – The action taken by the holder of a call if he wishes to purchase the underlying futures contract or by the holder

EXERCISE PRICE – Same as strike price.

EXPIRATION – The date after which an option may no longer be exercised. Although options expire on a specified date

FUTURES CONTRACT – A contract traded on a futures exchange for the delivery of a specified commodity or financial instrument at a future time. The contract specifies the item to be delivered and the terms and conditions of delivery.

FUTURES PRICE – The price of a particular futures contract determined by open competition between buyers and sellers

HEDGE – The buying or selling of offsetting positions in order to provide protection against an adverse change in price.

HOLDER – See Buyer.

IN-THE-MONEY – A call is said to be in-the-money if its strike price is below the current price of the underlying futures

INTRINSIC VALUE – The dollar amount that could be realized if the option were to be immediately exercised. In other

LONG - The position, which is established by the purchase of a futures contract or an option (either a call or a put) if there

MARGIN - The sum of money or securities, which must be deposited – and maintained -in order to provide protection to

MARGIN CALLS - Additional funds which a person with a futures position or the writer of an option may be called upon

NAKED WRITING - Writing a call or a put on a futures contract in which the writer has no opposite cash or futures market

OPENING TRANSACTION – A purchase or sale, which establishes a new position.

OUT-OF-THE-MONEY – A put or call option, which currently has no intrinsic value. That is, a call whose strike price is above the current futures price or a put whose strike price is below the current futures price.

PREMIUM - The price of an option – the sum of money, arrived at in the competitive market, which the option buyer pays and the option writer receives for the rights granted by the option.

PUT OPTION – An option which gives the option buyer the right to sell (go “short”) the underlying futures contract at the strike price on or before the expiration date.

PRICE SPREAD – The purchase and sale of two options covering the same futures contract with the same expiration dates but different exercise prices.

SELLER - Also known as the option writer or grantor. The sale of an option may be in connection with either an opening transaction or a closing transaction.

SERIES - All options of the same class having the same strike price.

SHORT - The position created by the sale of a futures contract or option (either a call or a put) if there is no offsetting position.

SPREAD – A position consisting of both long and short options (all calls or all puts). For example, a long position in a call with one strike price and expiration and a short position in another call with a different strike price and/or expiration.

STRADDLE - A combination in which the put and the call have the same strike price and the same expiration.

STRIKE PRICE - The price at which the holder of the call (put) may exercise his right to purchase (sell) the underlying futures contract.

TIME SPREAD - The purchase and sale of two options covering the same futures contract but with the same exercise price, but different expiration dates.

TIME VALUE - Any amount by which an option premium exceeds the option’s intrinsic value. If an option has no intrinsic value, its premium is entirely time value.

UNCOVERED OPTION – The sale of an option without a position in the underlying futures contract.

UNDERLYING FUTURES CONTRACT - The specific futures contract that can be bought or sold by the exercise of an option.

WRITING – The sale of an option in an opening transaction.

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