Options Trading Glossary and Dictionary

Bid – At any specific time, this is the highest offered price for an asset

Black-Scholes Model – This model is a theory of pricing using the strike price, the interest rate, market price and specific expiration date and other influential factors

Butterfly Spread – Purchasing two identical options but with one option having a high strike price and another option having a lower strike price, but have all other factors the same

Calendar Spread – Taking the same option type that has the same exercise price, but expires in different months of one another

Call – An options contract that offers the right to buy an asset by a certain date at an agreed-upon price

Condor – Buying two options with consecutive exercise prices and then buying another option with a lower exercise price and yet another with a higher exercise price at the same time

Covered Call – Holding an asset with a long position and selling call options on that said asset

Delta – The ratio that compares the price change of an option to the change of the asset

Exercise Price – see also Strike Price

Hedge – To reduce risk by taking opposing directions that will eliminate large loss or profit

Historic Volatility – See also Volatility; the standard deviation of an asset price’s changes after each day of trading for the previous 21 days

Holder – See also Writer; the buyer of the option

In-the-Money – When the strike price is more or less than the market price of the security, depending on the call or put option

Intrinsic Value – The difference between the strike price and the asset’s price; when the difference is in the negative, the figure will be a zero

Naked Option – A type of option that is written without a position in the asset

Option – A contract on an asset to either buy or sell by a certain date at a specified price

Open Interest – The sum total of options contracts not closed or delivered on any certain day

Out-of-the-Money – An option that has an exercise price with no intrinsic value

Premium – The cost an option buyer must pay to the option seller

Put – An option contract that is giving the right to sell an asset within a specific time range at a certain price

Straddle – When you have a long call and a short call and both options have the same strike price and expiration date

Strangle – When you have a long call and a short call with the same expiration date, but they each have different strike prices

Strike Price – The price that an asset must be bought or sold at if the buyer chooses to exercise the option

Time Value – The amount that the current market price exceeds its intrinsic value

Volatility – The degree of change in the price of an asset over a range of time

Writer – See also Holder; the seller of either an option of a call

         

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