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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:
