Options Trading Concepts

These flashcards cover essential concepts and terminology related to options trading, focusing on definitions and key terms to aid in study and comprehension.

What is the strike price in options trading?

The price per share agreed upon before an option is traded, at which stock may be bought or sold under the option contract.

What is a bid/ask in the context of options?

The bid price is the latest amount a buyer has offered for an option, while the ask price is the latest price a seller is willing to accept for the option.

What does 'premium' refer to in options trading?

The per-share amount paid to the seller in order to procure an option, which the seller keeps regardless of whether the buyer exercises the option.

What does In-the-Money (ITM) mean?

It means that the stock price is above the strike price for a call or below it for a put, indicating it is favorable for trading.

What indicates that an option is Out-of-the-Money (OTM)?

The current price is below the strike price for a call or above it for a put, with its price based on time value.

What is At-the-Money (ATM) in options terminology?

The point where the strike price is equal to the current stock price.

What does 'long' mean in options trading?

It implies ownership; when you purchase a stock or option, you are 'long' that item in your account.

What does 'short' mean in the context of options?

It refers to selling an option or stock that you do not own, thus being 'short' that security in your account.

What does it mean to 'exercise' an option?

The owner of the option takes advantage of their right to buy or sell the underlying asset.

What happens when an option is exercised?

The seller is 'assigned' and must fulfill their obligation to buy or sell under the terms of the option.

What is intrinsic value in options?

It refers to how much an option is ITM; the actual value of being in the money.

What is time value in the context of options?

The value associated with the time left until the option expires, reflecting the potential for price changes.

What is time decay?

The gradual decrease in time value as the expiration date of an option contract approaches.

What is the key difference between index options and equity options?

Index options are settled by cash and usually cannot be exercised before expiration, while equity options involve trading stock and usually can be exercised.

What is a stop-loss order?

An order to sell an option or stock when it reaches a particular price, meant to limit losses by closing out a position.