Assigned (an exercise notice) – Notification the option owner
exercised his rights making you obligated to fulfill the terms of the
option contract.
At-the-money
– An option whose strike price is equal (or very close) to the price
of the underlying asset.
Buy-Write Transaction
– The simultaneous purchase of 100 shares of stock and sale of
one call option.
Call – An option contract giving its owner the right to buy the
underlying asset at the strike price for a specified time.
Covered Call – A call option that has been sold and is backed by
an equivalent number of shares in stock.
Exercise – The election by the owner of an option to do what the
option allows: either buy or sell the underlying at the strike price.
Exercise Notice
– Notification the owner of the option has exercised
that option. The person assigned this notice is now obligated
to fulfill the terms of the contract.
Expiration – The date, after which, the option is no longer a valid
contract. For stock options, it is the third Friday of the specified
month.
Expire Worthless
– What happens to an option if it is out-of-the-money
at the close of business on expiration day, and the owner does not exercise
it.
Hedge - An investment made to reduce the risk of holding another investment. It involves taking an offsetting position in a related asset
Historical Volatility – The volatility of the stock in the
past. It is used to estimate future volatility. Historical
volatility is a property of the underlying stock.
Implied Volatility - The volatility that, when inserted into
the equation for calculating the theoretical value of an option, makes
the theoretical value the same as the price of the option in the marketplace.
Implied volatility is a property of the option.
In-the-money – A call option with a strike price lower than the
price of the underlying asset, or a put option with a strike price higher
than that of the underlying. An option with an intrinsic value.
Intrinsic Value
– The part of the option premium attributed to the
fact the option is in-the-money.
LEAPS – Acronym
for Long Term Equity AnticiPation Series. Puts and calls with
January expirations. They have expirations of up to three years
in the future.
Leg - One part of a spread posiiton
Long – The
position resulting from ownership of an asset.
Margin – The amount that must be deposited in the account in the
form of cash or eligible securities. The deposit is required to
protect the broker against the risk of loss.
Margin Account - An account in which an investor can (but is not
required to do so) buy securities on credit, using other securities held
in the account as collateral.
A margin account is required for all options trades.
Obligations – Attributes forced upon the seller of an option.
Offsetting - Moving in the opposite direction. A position acting as a hedge
Option – A
contract that gives its owner the right, but not the obligation, to either
buy or sell a specified underlying asset at a specified price for a specified
period of time.
Options Clearing
Corporation (OCC) is an organization that keeps records for every
outstanding options contract. When someone exercises an option, the
OCC verifies the person has the right to exercise it. It then randomly
assigns an exercise notice to one of the accounts that is currently short
the option.
Optionspeak
– The author's term for the language of options.
Out-of-the-money
- A call option with a strike price higher than the price of the
underlying, or a put option with a strike price lower than that of the
underlying asset. An option with no intrinsic value.
Premium – The price of an option. It is the sum of the intrinsic
value (if any) and the time value.
Put – An option contract giving its owner the right to sell the
underlying asset at the strike price for a specified time.
Rights – Attributes given to the owner of an option.
Rolling a Position
– The process of buying a previously sold option, and selling a
different option with a more distant expiration. It is often done
near expiration.
Series
- a specific option, with a specific strike and
expiration. ex: JNJ OCT55 put
Short – The position resulting from selling an asset that is not
owned. There is a future obligation to repurchase.
Spread - Two simultaneous trades in which you buy one option and
sell another.
The underlying is the same for both options.
Spread Transaction - A simultaneous options trade consisting of 2 (or more) legs. The legs are offsettiing - another way of saying the position is hedged
Standard Deviation
– A statistic describing how closely the data is distributed around
the average of the data
Strike Price – The price at which an option owner can buy or
sell the underlying asset.
Theoretical Value
(Fair value)
- The price an option is "worth", based on
a mathematical calculation and some assumptions. In the
real world, the actual price usually differs from the price
calculated as 'fair'.
Time Spread
– Two simultaneous trades in which one option is bought and another
sold – both with the same strike price and underlying, but with different
expirations.
Time Value
– The part of the option premium derived from the volatility and the
time remaining until expiration. It is the part of the option premium
that is NOT the intrinsic value.
Uncovered Call – A call option sold without owning the underlying.
Also called a naked call. Underlying
– The asset from which the option derives its value.
It is what the call owner may buy, or the put owner may sell.
Volatility – A measure of the price movement of a stock.
It is a measure of the tendency of a stock to make a significant move
in a short period of time.
