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Trading Lesson – Defining Options Terminology

January 29, 2015


•Strike price–A fixed price at which the option can be exercised. It is also known as the exercise price.

•Expiration date –The date on which the option expires. For stock options this is always a Saturday following the third Friday of the expiration month.

•Bid –The value at which an option is sold –wholesale.

•Ask –The value at which an option is purchased –retail.

•ITM “In the Money”- A call option is “ITM” if the current market value of the stock is above the strike price of the option. A put option is “ITM” if the current market value of the stock is below the strike price of the option. For example: if the current market price of xyz stock is $50, an xyz 45 call would be “in the money” by $5.

•ATM “At the Money”–When the current market value of the stock is the same as the strike price of the option.

OTM “Out of the Money”-When the strike price of a call is above the current market value of the stock, or if the strike price of a put is below the current market value of the stock, the option is “out of the money” by that amount. For example: The current market price of xyz stock is at $50, a call with a strike price of $55 would be “out of the money” by $5 and a put would be “out of the money” by $5 with a strike price of $45.

•Volume–The number of contracts that have exchanged hands for the day.

Open Interest–The number or outstanding contracts.

•Intrinsic Value–The actual value. It reflects the amount, if any, by which an option is “in the money”. For example: xyz stock is currently at $45 dollars a share, an xyz 40 call would have an intrinsic value of $5 per share. If the market price of the stock were to decline to $40 or lower, the call would no longer have any intrinsic value.

•Extrinsic Value–Time value. Any other value above the intrinsic value. Extrinsic value can be thought of as the probability of the stock finishing ATM.

•Implied Volatility-Value based on the current market sentiment of the future fluctuations of the stock.

•Time Value–The premium of the option. This is the length of time from the date of purchase to the expiration date. The additional amount that people are willing to pay over and above the intrinsic value. The further out the expiration date the greater the time value.

•Time Decay-The time value of an option erodes as the option approaches the expiration date. Time decay is not linear, it accelerates and becomes more noticeable during the last month prior to expiration.

Delta–The rate of change in an option’s price relative to a one unit change in the price of the stock. For example, if a Call Option has a delta of .50 and the price of the stock increases by one dollar, the option’s price increases by 50 cents.

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1 Reply to “Trading Lesson – Defining Options Terminology”


    Thanks coach G. for this solid foundation of info. looking forward to applying it

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