Glossary for options.

I thought it would be the perfect time for me to explain some

basic key terms that are used in trading options every single
day.

Assignment: The receipt of an exercise notice by an equity

option seller (writer) that obligates him/her to sell (in the case of
a short call) or buy (in the case of a short put) 100 shares of
underlying stock at the strike price per share.

At-the-money (ATM): This refers to the relationship between

the strike price and the current stock price. An option is
at-the-money when the stock price is equal to the strike price.

Call Option: A call is one type (or flavor) of an option. For each
call contract you buy, you have the right (but not the obligation)
to purchase 100 shares of a specific security at a specific price
within a specific time frame. A way to remember this is: You
have the right to call stock away from somebody.

Exercising Options: When the owner of an option invokes the

right embedded in the option contract, it’s called exercising the
option. The owner buys (if a call) or sells (if a put) the
underlying stock at the strike price, and requires the option
seller to take the other side of the trade.

Expiration Date: After this date, a listed option contract ceases

to exist. You can no longer trade it on any exchange or exercise
the right embedded in the contract.

Equity Option: A contract that gives its buyer (owner) the right,
but not the obligation, to either buy or sell 100 shares of a
specific underlying stock or exchange-traded fund (ETF) at a
specific price (strike or exercise price) per share, at any time
before the contract expires. Also known as “stock options.”

Historical Volatility: Historical volatility is a measurement of

the actual observed volatility of a specific stock over a given
period of time in the past, such as a month, quarter or year.

Implied Volatility: Implied volatility (IV) is derived from an

option’s price and shows what the market implies about the
stock’s volatility in the future. It is one of six inputs used in an
options pricing model, but it’s the only one that is not directly
observable in the market itself. IV can only be determined by
knowing the other five variables and solving for it using a
model. Implied volatility acts as a critical surrogate for option
value – the higher the IV, the higher the option premium.

In-the-money (ITM): This refers to the relationship between the

strike price and the current stock price. A call option is
in-the-money if the stock price is above the strike price. Put
options are in-the-money if the stock price is below the strike
price.

Intrinsic Value: Intrinsic value refers to the amount (if any) an

option is in-the-money.

Index Option: An option contract whose underlying security is

an index (like the S&P 500 Index – SPX), not shares of any
particular stock. Index options are usually cash-settled option
contracts.

Long: In the option trading, long doesn’t refer to things like

distance or the amount of time you hang onto a security. It
implies ownership of something. After you have purchased an
option or a stock, you are considered “long” that position in your
account. For ex: I am going long in AAPL 150 calls.

Out-of-the-money (OTM): This refers to the relationship

between the strike price and the current stock price. An option
is considered to be out-of-the-money if exercising the rights
associated with the option contract has no obvious benefit for
the contract owner. For call options, the market price is below
the strike price. For put options, the market price is above the
strike price.

Puts: A put is one type (or flavor) of an option. For each put
contract you buy, you have the right (but not the obligation) to
sell 100 shares of a specific security at a specific price within a
specific time frame. A good way to remember this is: You have
the right to put stock to somebody.

Premium: The price paid or received for an option in the

marketplace. For example, stock option premiums are quoted
on a price-per-share basis, so the total premium amount paid
by the buyer to the seller in any option transaction is equal to
the quoted amount times 100 (underlying shares). Option
premium consists of intrinsic value (if any) plus time value.

Profit + Loss Graph: A representation in graph format of the

possible profit and loss outcomes of a stock option strategy
over a range of underlying stock prices at a given point in the
future, most commonly displayed at option contract’s expiration
date.

Short: You can also be short in your account, meaning you’ve

sold an option or a stock without actually owning it. With
options, you can sell something you don’t own. If you do, you
may have additional obligations later. For ex: I am going short
on AAPL.

Standard Deviation: It’s important to note, this is about

options, not statistics. But you’d probably hear standard
deviation a lot in a room full of options traders, so let’s clarify its
meaning.

If we assume stocks have a simple normal price distribution, we

can calculate what a one-standard deviation move for the stock
will be. On an annualized basis the stock will stay within plus or
minus one standard deviation roughly 68% of the time. This
comes in handy when figuring out the potential range of
movement for a particular stock.

For simplicity’s sake, here we assume a normal distribution.

Most pricing models assume a log normal distribution. Just in
case you’re a statistician or something.

Strike Price: This is the pre-agreed price per share at which

stock may be bought or sold under the terms of an option
contract. Some traders call this the exercise price. Strike price
is one of the five basic parts of a standard stock options quote.

Stock Symbol: The stock symbol represents the underlying

security on a stock option quote. Examples include AMZN
(Amazon), GE (General Electric). Stock Options: Another name
for equity options (see definition above). Stock options are
listed on exchanges like the NYSE in the form of a quote. It is
important to understand the details of a stock option quote
before you make a move— like the cost and expiration date.
Stock Options Quote: Highlights the main terms and
conditions in a standard stock options contract.

Time Value: The price of nearly all option contracts includes

time value. This part of an option’s price is based on its time to
expiration. If you subtract the intrinsic value from an option’s
price, you’re left with time value. Because out-of-the-money
options have no intrinsic value, their price is entirely made up of
time value.

Write: To sell a call or put option contract that has not already
been purchased (owned). The seller of an option contract is
considered the “writer” of that contract. This is known as an
opening sale transaction and results in a short position in that
option. The seller (writer) of an equity option is subject to
assignment at any time before expiration and takes on an
obligation to sell (in the case of a short call) or buy (in the case
of a short put) underlying stock if assignment does occur.

Now that you are ready for next part let's get right into it.

What are options?

Options trading can look more complex than it is. If you’re
looking for a simple options trading definition, it goes something
like this:
Options trading is the trading of instruments that give you the
right to buy or sell specific security (ex: AAPL) on a specific
date (ex: expiration date) at a specific price (ex: strike price).

Options contracts give the owner rights and the sellers

obligations.

In simpler words,
Calls are betting on price to go up, and
Puts are betting on the price to go down.

The different types of options:

To form your database in options trading, start by getting
accustomed to the different types of options you can trade.

The two fundamental classes of options to pick from are

1. Calls
2. Puts.
What is a call option?

A call option gives you the right to buy an underlying security at

a designated price within a certain time period (think of it as
calling the underlying security to you.)

The price you pay is called the strike price. The end date for
exercising a call option is called the expiration date.
You're betting that the price of the stock will go up and we can
flip the premiums.

What is a put option?

A put option is the opposite of a call option. Instead of having

the right to buy an underlying security, a put option gives you
the right to sell it at a set strike price (think of this as putting the
underlying security away from you.)
Put options also have expiration dates.

You’re betting the stock price will fall and you can flip the
premiums.

If the stock price falls you will make money as your option
premium will go up.
If you don’t know, yes, LOL, you can also make money when
the stock price is falling by buying puts.
How does options trading work?
Option trading is something you can do off your broker account:
Interactive Brokers.

What is buying a call?

Buying a call means you’re buying a contract to purchase a
particular stock or asset by a set expiration date.

Buying call options can make sense if you think the price of the
underlying asset is going to rise before the expiration date.
For example, say you buy a call option for 100 shares of ABC
stock, only this time you’re hoping for a price increase.
Your call option contract gives you the right to buy shares
at $500 each. Meanwhile, the stock’s price climbs to
$1000 a piece. You could effectively use a call option
contract to buy that stock at a discount.

Or you can even just flip the premiums (no need to have the
headache)

What is buying a put?

When you buy a put, you’re buying a contract that gives you an
option to sell a security by a certain expiration date at a certain
price.
Before buying a put, a few things to consider include:
● How much do you want to invest
● What kind of time frame do you want to invest for
 ● Anticipated price movements for the underlying asset
Buying put options can make sense if you think the price of the
underlying asset is going to go down before the expiration date.
If you buy put options at one strike price, then the asset’s price
drops, you can exercise your option at the original strike price.

For example, say you buy a put option for 100 shares of ABC
stock at $500 per share. Prior to the option’s expiration date,
the stock’s price drops to $250 per share. If you choose to
exercise your option, you could still sell the 100 shares of stock
at the higher $500 per share price.

Or you can even just flip the premiums.

How are options priced?

Options pricing can be calculated using different models. But at
its root, options trading prices are based on two things: intrinsic
value and time value.

An option’s intrinsic value denotes its profit potential, based on

the difference between the strike price and the asset’s current
price.

Time value is used to calculate how volatility may affect an

underlying asset’s price up until the expiration date.

The stock price, strike price and expiration date can all factor
into options pricing. The stock price and strike price affect
intrinsic value, while the expiration date can affect time value.