Basic Options Terms

Options are good investing and speculative instruments. But options terminology can confuse even experienced investors. In this article we will take a few basic options terms.

Option - A contract giving the holder the right, but not the obligation, to buy or sell a particular security at a predetermined price provides for a certain period. The seller of the option has the obligation to the terms of the agreement is fulfilled in case of exercise of the buyer's option.

Call Option - A contract that gives the buyer the right, but not change the obligation, to buy at an exercise price a certain amount of underlying any time before the contract expires (if the American style option) or any expiration (as the European-style option). The call option buyer hopes the price of the shares will rise by a specific date when the put option seller hopes that the price of the shares to decline or remain stable by the specified date.

For example: I'm writing a call option with 100 Microsoft shares, strike at $ 35 and maturity in July. Now I have an obligation to the terms of the agreement are fulfilled. I get some money for this contract and I hope that the price will be more than $ 35, no. But if you exercise the option buyer contract I have to sell you 100 Microsoft shares at $ 35 each.

Put Option - An option contract giving the owner the right, but not the obligation, to sell at an exercise price a specified amount of an underlying asset within a certain time. The put option buyer hopes the price of the shares will drop by a specific date when the put option seller hopes that the price of the shares rise or remain stable by the specified date.

For example, I write a putt option with 100 Microsoft shares, strike at $ 35 and maturity in July. I get some money for this contract and I hope that the price will not be less than $ 35. But if you exercise the option buyer contract I should buy from you 100 Microsoft shares at $ 35 each.

Underlying Security - The stocks, commodities, futures or other financial instruments to which an option contract is based.

For example: In previous examples underlying security is Microsoft stock.

Exercise Price or Strike Price - The price that the option contract, the holder may buy or sell the underlying asset.

Due Date - The date on which an option and all rights associated with it ceases to exist. Maturity is the last day on which an option can be exercised.

Expiration - The date and time after which an option can not be exercised.

Exercise - can holder to the right to appeal associated with a particular option. In the exercise of a call option, the holder acquires shares at an exercise price of the vendor option. In the case of a put, the holder of the option the seller sells the stock option at the strike price.

Automatic Exercise - The automatic exercise of in-the-money option at expiration of the clearing firm.

Premium - the total price of an option both intrinsic and extrinsic or time.

In-the-Money Option - A call option is in-the-money if the strike price is lower than the market price of the underlying asset. A put option is in-the-money if the strike price is higher than the market price of the underlying asset
At-the-money - An option is at-the-money if the strike price is equal to the current market price of the underlying asset.

Out-of-the-Money - An option with strike price is above (in the case of a call) or below (in the case of a put) the current market price of the underlying asset.

Intrinsic Value - The part of the price of an option that can account for the amount by which the option is in-the-money. Intrinsic Value = Oprion price - TimeValue (for options in-the-money)

Time Value of extrinsic value - The amount by which the current price of an option exceeds its intrinsic value. The price of the out-of-the-money and at-the-money options consists exclusively of extrinsic value

Options can be risky, but you can control and reduce risks. If you buy newbie in options, buy some books, visit some seminars or online training before your first option or sell.

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