Your Options Primer: Terminology You Must Know
When dealing with options, there are certain terms that should be understood by investors. Knowing the meaning of these words will help in communicating when placing trades and when researching future potential investments. Some of these option related terms are:
• Call Option. A call option is the right, but not the obligation, to purchase 100 shares of a particular stock for a set price during a specific time frame (i.e., until the option expires).
• Put Option. A put option is the right, but not the obligation, to sell 100 shares of a particular stock for a set price during a specific time frame.
• Strike Price. The strike price of an option is the specific fixed price at which an investor may purchase or sell the shares of the underlying asset.
• Expiration Date. The expiration date is the date on which an option will expire and is thus no longer able to be exercised by the investor to buy or sell shares of the underlying asset.
• Exercise. The exercise of an option is the action taken by an investor to either buy a stock using a call option or to sell a stock using a put option.
• Intrinsic Value. The intrinsic value of an option is the amount by which the price of the underlying asset exceeds the strike price for a call option, or the amount by which the price of the underlying asset is below the strike price for a put option.
• Time Value. The time value of an option is the current price of that option minus its intrinsic value.
• In-The-Money. An in-the-money option occurs when the strike price of the underlying stock exceeds the strike price of the option.
• At-The-Money. When an option is at-the-money, the price of the underlying asset is the same as the option's strike price.
• Out-Of-The-Money. An out-of-the-money call option is an option in which the price of the underlying stock or other asset is below the strike price of the option. An out-of-the-money put option occurs when the price of the underlying asset is above the strike price of the option.
• Option Volume. The option volume is the number of option contracts that are traded in a particular option on a specific day or period of time.
Having a thorough understanding of even the most basic option terminology will help you to be more confident in placing option trades as well as in communicating the information about those trades with a financial professional who may be assisting you with these investments.
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