Options Terminology
- Strike price. The price at which the option can be exercised. Also, the price at which the option begins to build intrinsic value.
- Expiration date. The date on which the option expires.
- Contract Size. Refers to the amount of the underlying asset. For stock options it is 100 shares per option.
- Exercise. Electing to buy or sell the underlying security at the strike price.
- Premium. To the buyer, this is the cost of the option. To the writer, this the amount of money received for selling the option.
- Intrinsic Value. The amount of profit that would be realized if the option were to be exercised. This is determined by the amount that the option is in-the-money.
- Time Value. The value of the time remining before expiration. Also, the portion of the value that exceeds intrinsic value. At expiration the time value is always zero.
- Out-of-the-money. For a call option this occurs when the price of the underlying asset is below the strike price of the option. For a put option this means that the price of the underlying asset is above the strike price of the option. This is sometimes abbreviated as "OTM". Out-of-the-moeny options have only time value and no intrinsuc value.
Example: If a stock is trading at $54 then any call option with a strike price above $54 would be out-of-the-money. And any put options with a strike price below $54 would be out-of-the-money.
- In-the-money. For a call option this means that the price of the underlying asset is above the strike price of the option. For a put option this means that the price of the underlying asset is below the strike price of the option. This is sometimes abreviated as "ITM".
Example: If a stock is trading at $54 then a call option with a strike price of $50 would be in the money by $4 and a put option with a strike price of $60 would be in the money by $6.
- At-the-money. The occurs when the price of the underlying asset is the same as the strike price of the option.
- Near-the-money. "Near-the-money" is a more informal term meaning that the price of the underlying is near the strike price.
- Implied volatility. This is the estimation of the volatility of the underlying security during the life of the option.
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