Option Trading Glossary
Bid - The highest offered price at a specified time.
Black-Scholes Model – A theoretical method of pricing using strike price, market price, interest rates, expiration date and other factors.
Butterfly Spread – A trading strategy consisting of the purchase of two identical options, together with the sale of one option with a higher strike price, and one option with an lower strike price.
(All options are of the same type, have the same underlying asset and the same expiration date.)
Calendar Spread – A trading strategy consisting of one long and one short option of the same type with the same exercise price, but which expire in different months.
Call – An options contract conferring the right to buy an underlying asset, such as 100 shares of stock, at a pre-set price, by a specified date.
Condor – A trading strategy consisting of the sale (or purchase) of two options with consecutive exercise prices, together with the sale (or purchase) of one option with a lower exercise price and one option with a higher exercise price.
Covered Call – A trading strategy which consists of holding a long position in an asset and selling call options on that same asset.
Delta - A ratio comparing the change in the price of an option to that of a change in the underlying asset.
Exercise Price – See Strike Price
Hedge – A technique of reducing risk by taking positions which tend to move in opposite directions.
Historic Volatility – (See Volatility) Calculated by using the standard deviation of underlying asset price changes from close to close trading for the prior 21 days.
Holder – The buyer of an option. (See Writer)
In-the-Money - A (call/put) option is in-the-money if the strike price is (less/more) than the market price of the underlying security.
Intrinsic Value - The difference between the underlying asset's price and the strike price. (For both puts and calls, if the difference is negative, the value is given as zero.)
Naked Option - An option written (sold) without a position in the underlying asset.
Option – A contract to buy (call) or sell (put) an underlying asset at a pre-set price by ('American style') or on ('European style') a specified date.
Open Interest - The total number of options contracts not closed or delivered on a given day.
Out-of-the-Money - An option whose exercise price has no intrinsic value.
Premium - The price an option buyer pays to an option seller.
Put - An option contract granting the right to sell an asset at a pre-set price within a specified time.
Straddle - A trading strategy consisting of a long (short) call and a long (short) put, in which both options have the same strike price and expiration date.
Strangle - A trading strategy consisting of a long (short) call and a long (short) put in which both options have the same expiration date, but different strike prices.
Strike Price - The price at which an underlying asset must be bought (call) or sold (put), if an option is exercised.
Time Value - The amount by which the current market price of a option exceeds its intrinsic value.
Volatility - A measurement of degree of change in price over a specified period of time.
Writer - The seller of either a call or put option
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