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Options 101

American-style expiration: an options contract that can be exercised anytime before the expiration date.

At-the-money: An option is at-the-money if the strike price of the option is equal to the market price of the underlying index.

Call options: gives the holder the right to buy a stock at a certain price within a certain time. An easy way to remember that calls give you the right to buy stock is to think of buying stock as calling it to you.

Cash settlement: the conversion of an options contract into cash. Index options are cash settled, which means the index option represents ownership of money.

Double witch: the expiration of equity options and index options.

European-style expiration: an options contract that can only be exercised on the day that the contract expires. Most index options have European-style expirations, meaning they can only be exercised on expiration day.

Exercise: the process of converting an options contract into the underlying security. For example, exercising one call option on a stock means the holder would get 100 shares of the stock.

Exercise/Strike price: the price at which an options contract can be exercised to buy or sell stock. If you look at an options contracts specifications, you would see XYZ January 45 calls. XYZ represents the underlying stocks ticker symbol. January refers to when the contract expires and 45 refers to the exercise/strike price.

Expiration: the date on which an options contract ceases to exist.

Floor broker: individual who is hired, or employed by brokerage firms to execute the brokerage firms' customers orders at an exchange.

The Greeks: Specialists, market makers, and other professional traders think of their options positions in terms of the greeks, which enables them to see and control the risk of their market exposure. Most people and this includes the typical investor who uses options to augment a stock portfolio do not need to be fluent in the greeks. It is, however, important to have an understanding of the terms.

 

• Delta: measures the price change in an options contract per one-point change in the underlying stocks price.
• Vega: measures how change in volatility effects an options price.
• Theta: measures time decay in an options contract.
• Rho: measures effect interest change rate has on an options contracts price.
• Gamma: measures how much an options contracts delta changes when the underlying stocks price changes by one point.

In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying index. A put option is in-the-money if the strike price is greater than the market price of the underlying index.

Liquidity: the ease with which a security can be bought or sold without changing the securities price.

Market maker: trader who assists specialist in maintaining fair and orderly market. Market makers independently quote prices, often improving the prices that customers pay, or receive, to trade options.

Out-of-the-money: A call option is out-of-the-money if the strike price is greater than the market price of the underlying index. A put options is out-of-the-money if the strike price is less than the market price of the underlying index.

Payment for order flow: the practice of paying a brokerage firm to route orders to a specific destination.

Physical settlement: the conversion of an equity options contract into stock. Equity options are physically settled, which means the contract represents ownership in 100 shares of stock.

Premium: the price paid by the buyer, received by the seller of an options contract.

Put options: gives the holder the right to sell a stock at a certain price within a certain time. An easy way to remember that puts give you the right to sell stock is to think of it as putting stock off on someone else.

Specialist: trader responsible for maintaining a fair and orderly market in an assigned security.

Time decay: options lose a little bit of their value each day toward expiration. The phenomenon is known as time decay.

Triple witching: the expiration of equity options, index options and index futures contracts on the same day. The quarterly event is mistakenly thought to increase volatility in the stock market due to the effect traders unwinding positions. In fact, the triple witchings reputation is worse than the reality. Most traders start unwinding their positions the week before all of the derivative contracts expire.

 

For more information visit our options glossary.