Glossary

American option

Options that an holder may exercise at any time until the expiry date.

Assignment

When the holder exercise his option, the option writer receive a notice that obliges him to sell or buy the shares at the stipulated strike price.

At-the-money option

When the price of the underlying equity equals the strike price of the option.

Bear Spread

Purchase of an option (call or put) with a higher strike price and the sale of an option with a lower strike price with the same expiry date.

Break-even point

The point a which the investors makes no profit.

Bull Spread

Purchase of an option with a lower strke price and simultaneous sale of an option with a higher strike and same expiry date.

Call option

An option which gives the holder the right, but not the obligation, to buy a fixed amount of a certain stock at a specified price within a specified time. Calls are purchased by investors who expect a price increase.

Collar

Simultaneous purchase of a put option and sale of a call option having the same expiry date but different strike price.

Combination

Simultaneous purchase or sale of call and put of the same stock with different expiry date and strike prices.

Covered write

When the writer of a call option holds an equivalent quantity of the underlying stock for each option contract he sells.

European option

Option which the holder can only exercise on the expiry date.

Ex-Dividend date

The holder of shares purchased ex dividend is not entitled to an upcoming already-declared dividend, but is entitled to future dividends.

Exercise

The process by which the holder exercise his right to buy or sell the underlying according to the terms of the option contract.

Expiry date

The date at which an option contract expires. This means that the option can’t be exercised after that date.

In-the-money option

When the strike price of a call (or put) option is lower (or higher) than the price of the underlying stock.

Intrinsic value

The difference between the current market value of the underlying interest and the strike price of an option. In-the-money is a term used when the intrinsic value is positive.

Last trading day

The last day on which a futures or option contract may be traded.

Leverage

Means to increase the value of an investment which does not involves borrowing but offering the prospect of high return.

Margin requirement

An amount of the securities an investor has to deposit with his broker to guarantee the purchase of the underlying securities when he sells an option.

Naked write

Selling or writing a call or a put without holding an equivalent quantity of the underlying stock.

Open interest

It indicates the number of contracts on a particular stock that are still outstanding. the greater the open interest, the greater the liquidity in the market, therfore the easier it is to liquidate the position.

Option Premium

Price the buyer has to pay the seller for the option.

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Out-of-the-money option

When the strike price of a call (or put) option is higher (or lower) than the price of the underlying stock.

Portfolio

A collection of investments held by an institution or a private individual

Put option

An option which gives the holder the right, but not the obligation, to sell a fixed amount of a certain stock at a specified price within a specified time. Puts are purchased by those who think a stock may go down in price.

Straddle

Purchase (or sale) of a call and a put with the same expiry date and strike price.

Strangle

Purchase or sale of call and put options on the same stock, with same expiry months and different strike prices.

Strike price

Price at which an investor holding an option can buy or sell the underlying stock.

Time value

Portion of the premium that represents the remaining time until the expiry of an option contract. The time value is equal to the differene between the intinsic value and the option premium.

Volatility

A statistical measure of changes in price over a period of time.

Writer

The seller of an option contract.