But here we present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides. An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price. An underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration.
An equity option 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 writer , on the other hand, has the obligation to sell shares at the strike price if called upon to do so.
A settlement style that is generally characteristic of index options. Instead of stock changing hands after a call or put is exercised physical settlement , cash changes hands. 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.
The fee charged by a brokerage firm for its services in the execution of a stock or option order on a securities exchange. Any cash received in an account from the sale of an option or stock position. With a complex strategy involving multiple parts legs , a net credit transaction is one in which the total cash amount received is greater than the total cash amount paid. Any cash paid out of an account for the purchase of an option or stock position. With a complex strategy involving multiple parts legs , a net debit transaction is one in which the total cash amount paid is greater than the total cash amount received.
The exercise or assignment of an option contract before its expiration. This is a feature of American-style options that may be exercised or assigned at any time before they expire. 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 per share, at any time before the contract expires. With a complex strategy involving multiple parts legs , an even money transaction results when the total cash amount received is the same as the total cash amount paid.
A security that represents shares of ownership in a fund or investment trust that holds a basket collection of specific component stocks. 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.
If you buy stock on the ex-date or afterwards, you will not receive the dividend. 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 price per share at any time before the contract expires.
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. The day on which an option contract literally expires and ceases to exist.
For equity options, this is the Saturday following the third Friday of the expiration month. 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. If the option is out-of-the-money, the extrinsic value is equal to the entire premium.
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. 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 LEAPS calls and puts can have expirations up to three years into the future and expire in January of their expiration years.
Instead of entering one order to establish all parts of a complex position simultaneously, one part is executed with the hope of establishing the other part s later at a better price. 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 instead the logarithms of each change. So in a sense a lognormal distribution could be considered to have a bullish bias.
A position resulting from the opening purchase of a call or put contract and held owned in a brokerage account. 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. 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: 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.
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. A transaction that creates or increases an open option position. An opening buy transaction creates or increases a 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: 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. The settlement style of all equity options in which shares of underlying stock change hands when an option is exercised. The price paid or received for an option in 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. A representation in graph format of the possible profit and loss outcomes of an equity option strategy over a range of underlying stock prices at a given point in the future, most commonly at option expiration.
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. The put seller or writer , on the other hand, has the obligation to buy shares at the strike price if called upon to do so.
Rolling a long position involves selling those options and buying others. Rolling a short position involves buying the existing position and selling writing other options to create a new short position.
A position resulting from making the opening sale or writing of a call or put contract, which is then maintained in a brokerage account. If the shares can be purchased at a price lower than their initial sale, a profit will result. If the shares are purchased at a higher price, a loss will be incurred. Unlimited losses are possible when taking a short stock position. A complex option position established by the purchase of one option and the sale of another option with the same underlying security.
A spread order is executed as a package, with both parts legs traded simultaneously, at a net debit, net credit, or for even money. By definition, the premium of at- and out-of-the-money options consists only of time value. It is time value that is affected by time decay as well as changing volatility, interest rates and dividends. The fluctuation, up or down, in the price of a stock. To sell a call or put option contract that has not already been purchased owned.
This is known as an opening sale transaction and results in a short position in that option. The seller writer of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell in the case of a short call or buy in the case of a short put underlying stock if assignment does occur.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading options. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risks , and may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies.
Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point. The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is no guarantee that the forecasts of implied volatility or the Greeks will be correct.
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The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. 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 month that is farther away in time.More...