Links to non-Ally websites The technical jargon associated with option trading can often make it seem intimidating. An option is at-the-money when the stock price is equal to the strike price. For each call contract you buy, you have the right but not the obligation to purchase shares of a specific security at a specific price within a specific time frame.
A way to remember this is: You have the right to call stock away from somebody.
Options Trading Glossary of Terms
The owner buys if a call or sells if a put the underlying stock at the strike price, and requires the option seller to take the other side of the trade.
You can no longer trade it on any exchange or exercise the right embedded in the contract. IV can only be determined by knowing the other five variables and solving for it using a model.
Implied volatility acts as a make money quickly surrogate for option value — the higher the IV, the higher the option premium. A call option is in-the-money if the stock price is above the strike price.
Put options are in-the-money if the stock price is below the strike price. Index options are usually cash-settled option contracts. It implies ownership of something.
Options Spreads What Is an Option? Options are financial instruments that are derivatives based on the value of underlying securities such as stocks. An options contract offers the buyer the opportunity to buy or sell—depending on the type of contract they hold—the underlying asset.
An option is considered to be out-of-the-money if exercising the rights associated with the option contract has no obvious benefit for the contract owner. For call options, the market price is below the strike price.
For put options, the market price is above the strike price.
An options contract is an agreement between two parties to facilitate a potential transaction on the underlying security at a preset price, referred to as the strike priceprior to the expiration date. The two types of contracts are put and call options, both of which can be purchased to speculate on the direction of stocks or stock indices, or sold to generate income.
For each put contract you buy, you have the right but not the obligation to sell shares of a specific security at a specific price within a specific time frame. A good way to remember this is: You have the right to put stock to somebody.
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- Options Trading Terminology and Definitions | Ally
For example, stock option premiums are quoted on a price-per-share basis, so the total premium amount paid by the buyer to the seller in any option options trading terms and conditions is equal to the quoted amount times underlying shares. Option premium consists of intrinsic value if any plus time value.
Watch this video about the basic anatomy of a stock options quote.
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If you do, you may have additional obligations later. If we assume stocks options trading terms and conditions a simple normal price distribution, we can calculate what a one-standard-deviation move for the stock will be. This comes in handy when figuring out the potential range of movement for a particular stock.
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- But here we present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides.
Most pricing models assume a log normal distribution. Some traders call this the exercise price. Strike price is one of the five basic parts of a standard stock options quote.
Stock options are listed on exchanges like the NYSE in the form of a quote. It is important to understand the details of a stock option quote before you make a move— like the cost and expiration date.
Options Trading Definitions – Must Know Terms for Beginners
Watch this video to learn how to read a stock options quote. Because out-of-the-money options have no intrinsic value, their price is entirely made up of time value.
This is known as an opening sale transaction and results in a short position in that option. The seller writer of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell in the case of a short call or buy in the case of a short put underlying stock if assignment does occur.