Option Trading Terms
Ask Price -
The best price at which someone is willing to sell. This is also the price at which you would purchase an option with a market order.
At the money. When an option's exercise price and the underlying security are at the same price.
Bid Price -
The best price at which someone is willing to buy. This is also the price at which you would sell an option with a market order.
Call Option -
An option where you have the right to purchase an underlying security at a specific price for a specific amount of time.
Chicago Board Options Exchange
Chicago Board of Trade
Covered Call -
This is when a call option is sold on a security already held by the person selling the call option. This strategy is often used as a way to generate extra income on a sideways moving security that you already own.
Deep in the money. This is an option that has a lot of intrinsic value meaning that the option could be exercised for significant value. If the option is a call, the current price of the underlying security is much greater than the exercise price. If the option is a put, the current price of the underlying security is less than the exercise price.
This measures the rate at which an option changes relative to the underlying security's price changes. To calculate divide the change in option price by the change in underlying security price.
Exercise Price -
This is the price at which and option can be exercised. Also can be referred to as the strike price.
Expiration Date -
This is the last day on which an option can be exercised. After this date the option will either automatically exercise or expire worthless.
In the money. This is when an option can be exercised for intrinsic value.
Intrinsic Value -
This is the amount an option is in the money (ITM).
Near the money. This is when an option is close to its exercise price.
Out of the money. This is when an option can't be exercised for any value. An OTM option has no intrinsic value because the stock price is below the option's exercise price.
Put Option -
An option where you have the right to sell an underlying security at a specific price for a specific amount of time.
The difference between the bid and ask price. Generally the larger the spread the less the liquidity.
Strike Price -
This is the exercise price of an option.
This is a measure of how much the price fluctuates. The higher the volatility the more the price will move up and down.
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