Basics of Options (Derivatives) Terminology

In this article, we look at some of the terminology used when buying or selling options or derivatives. It is imperative that you under this terminology to get a good grasp of the Options industry.

Strike Price

The Strike Price is the price at which an underlying asset (or stock) can be purchased or sold. If you are a call holder, you will hope that the value of the underlying asset goes UP substantially for you to exercise a position of profit. However if you have a Put Option, you will hope that the value of the asset goes DOWN substantially for you to exercise a position of profit. Both these transactions must be down before the expiration date of the options.

Listed Option

Options that are traded on national options exchange such as the Chicago Board Options Exchange (CBOE) are called Listed Options. Listed Options carry fixed strike prices and expiration dates. 1 Listed Option can hold 100 shares of a corporation's common stock.

In The Money

If a Call Option (share of stock) is above the Strike Price, then it is known to be In-The-Money.
If a Put Option (share of stock) is below the Strike Price, then it is known to be In-The-Money.
The amount by which an option is in-the-money is known as its intrinsic value.

Option Premium

The total cost of an option (the total price paid for the option) is called the option premium. The Option Premium is determined by various # of variables including:

Current Stock Price
Time Until it Expires (Time Value)
Volatility of the market and the option
Strike Price