Options Trading

Options Contract

An agreement between two parties for the sale or purchase of some asset (stock).

Strike Price

The price at which the stock or commodity underlying a call option (such as a warrant) or a put option can be purchased (called) or sold (put) during a specified period. The agreed upon future value of the stock.

Premium Compensation

The amount of money transferred from the buyer to the seller for entering the agreement.

Exercise

When the buyer acts on their right (as per the initial agreement) to purchase the asset at the strike price.

Assignment

From the seller's point of view, this is when you are given the contract as the stocks are being transferred to the buyer who is exercising the right to purchase at strike price.

Call Option

Gives the option holder the right (but not the obligation) to BUY shares of stock at an agreed upon price on or before a particular date.

Put Option

Gives the option holder the right (but not the obligation) to SELL shares of stock at an agreed upon price on or before a particular date.

Expiration Date

The date when the Option Contract will expire.

Volume (VLM)

How many contracts of a particular option were traded during the latest session.

Bid price

The latest price level at which a market participant wishes to buy a particular option.

Ask price

The latest price offered by a market participant to sell a particular option.

Implied Bid Volatility (IMPL BID VOL)

The future uncertainty of price direction and speed. This value is calculated by an option-pricing model such as the Black-Scholes model and represents the level of expected future volatility based on the current price of the option.

Open Interest (OPTN OP)

This number indicates the total number of contracts of a particular option that have been opened, and decreases as open trades are closed.

Delta

This can be thought of as a probability. For instance, a 30-______ option has roughly a 30% chance of expiring in-the-money. It also measures the option's sensitivity to immediate price changes in the underlying. The price of a 30-______ option will change by 30 cents if the underlying security changes its price by one dollar.

Gamma (GMM)

This is the speed the option is moving in or out-of-the-money. It can also be thought of as the movement of the delta.

Vega

This is a Greek value that indicates the amount by which the price of the option would be expected to change based on a one-point change in implied volatility.

Theta

This is the Greek value that indicates how much value an option will lose with the passage of one day's time.

Time Decay

This is a measure of the rate of decline in the value of an options contract due to the passage of time. It accelerates as an option's time to expiration draws closer since there's less time to realize a profit from the trade.

Premium

The combination of an option's intrinsic value (the in-the-money amount of an options contract, which, for a call option, is the amount above the strike price that the stock is trading) and extrinsic or time value (the added value an investor has to pay for an option above the intrinsic value).

Straddle

If you simultaneously buy a call and put option with the same strike and expiration. This position pays off if the underlying price rises or falls dramatically; however, if the price remains relatively stable, you lose premium on both the call and the put. You would enter this strategy if you expect a large move in the stock but are not sure which direction.

Strangle

A strategy betting on an outsized move in the securities when you expect high volatility (uncertainty) is to buy a call and buy a put with different strikes and the same expiration. This strategy requires larger price moves in either direction to profit but is also less expensive than a straddle.

Option Class

All options of the same type (calls or puts)

Option Series

Puts or calls with the same underlying security that also have the same exercise price and expiration date / maturity.