terminology1


Options Trading Terminology 

 

What is an options contract?

An options contract is a legally binding agreement between two parties. One agrees to buy and the other agrees to sell or vise versa. There are two types of options contracts, calls and puts.

1 option contract = 100 shares (typically)

 

What does being long an option mean?

Being long an option means you’re the buyer. You paid your money to get it (debit).

 

What does being short an option mean?

Being short an option means you’re the seller. You accepted payment for it (credit).

 

What is a debit?

A debit is money you’ve paid as the buyer of an option contract.

 

What is a credit?

A credit is money you’ve received as a seller of an option contract.

 

What is an option chain?

An option chain is a simply a list of tradable option contracts, separated by monthly or weekly expirations.

 

What is the bid?

The bid price is the price at which you can sell an option contract.

 

What is the ask?

The ask price is the price at which you can buy an option contract.

 

What is the bid/ask spread?

The price difference between the bid price and the ask price.

 

What is the Strike price?

The striking price is the agreed upon price by both parties at which they will buy or sell shares of stock on or before the expiration date.

 

When or what is the expiration date?

Their are multiple expiration dates available at any given time. The expiration date is the time period you’ll have before the option expires. If an option expires OTM it will expire worthless. If an option expires ITM it will automatically be assigned, if your short that is.

 

In The Money (ITM)

For a call option, the strike price is below the market price.

For a put option, the strike price is above the market price.

 

Out of The Money (OTM)

For a call option, the strike price is above the market price.

For a put option, the strike price is below the market price.

 

At the Money (ATM)

For calls and puts the market price is trading at or very near the strike price. Maybe slightly in or out of the money.

 

Exercise

Refers to option buyers. Those that have the right to buy or sell should they choose.

 

Assignment

Refers to option sellers. Those that have the obligation to buy or sell should the option buyer choose.

 

Limit Order

An order to buy or sell an option at a specific price or a more favorable price than selected.

 

Stop Limit Order

A combination of a stop order and a limit order. When the stop price is triggered the order automatically becomes a limit order for the selected price (or better price).

 

Stop Order

Also known as a Stop Loss order. An order to buy or sell an option when a specific price is reached (stop price).

 

Market Order

An order to buy or sell an option immediately at the current market price.

 

Delta

Is a theoretical measurement highlighting the degree to which the options premium changes for every $1 change in the underlying asset.

 

Gamma

Is a theoretical measurement showing the rate of change in Delta for a $1 move in the underlying.

 

Theta

Is the theoretical measurement of the effect of time decay on options premium.

 

Vega

Is the theoretical measurement of the effect a 1% move in volatility has on option premiums.

 

This image should help you visualize some of the terms we’ve discussed above. Click to enlarge.

Option Breakdown
Trading Screen Breakdown

 

Please do your best to understand all of these terms. They are vital to understanding the information that follows.

 

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