Investment Account Manager Forum

General Category => Options => Topic started by: Forum Administrator on February 05, 2019, 01:32:42 PM

Title: Understanding Options
Post by: Forum Administrator on February 05, 2019, 01:32:42 PM
Understanding Options

The following definitions must be understood by traders of American Style equity stock options.

An option contract is a forward agreement giving the holder a future right, not an obligation, to conduct a transaction involving an underlying asset at a specific price at a future date.

Buyer (holder) of option: holds the right to decide whether the option is executed.

Seller (writer) of the option: bound by an obligation to the terms of the option agreement.

Assignment: the activation of the right to buy or sell the underlying security.

Exercise: the receipt of an exercise notice by an option seller that obligates the writer to fulfill the terms of the option agreement.

Option exercise (strike) price:  the predetermined price the buyer of call option is will to purchase the underlying security, or the buyer of a put to sells the underlying security at the strike price.  If the call is exercised, the seller of a call will deliver the underlying security at the strike price, and the seller of a put is required to buy the security at the strike price.

Option expiration date: The date at which the options ability to be executed terminates, which most commonly occur on the Saturday following the third Friday of each month. Weekly cycles also trade, but at less volume.

Option premium:  The price of the option.

In-the-money-option
   Call option the underlying stock price is greater than the option strike price.
   Put option the underlying stock price is less than the option strike price.

Out-of-the-money:
   Call option the underlying stock price is below the option strike price.
   Put option the underlying stock is above the option strike price.

At- the-money:
   Call or put option the underlying stock price is equal to the option strike price.

Intrinsic value: this represents the options in-the-money value. Options that are out-of-the-money or at-the-money do not have any intrinsic value.

Time value premium: the part of the option price that is not intrinsic.

Investment Account Manager will help monitor option positions by tracking performance and tax consequences of option trading. 

To learn more about option trading strategies, please visit:   the CBOE for educational materials including online classes. http://www.cboe.com/education/getting-started