financetom
Personal Finance
financetom
/
Personal Finance
/
Options terms every investor should know
News World Market Environment Technology Personal Finance Politics Retail Business Economy Cryptocurrency Forex Stocks Market Commodities
Options terms every investor should know
Jan 10, 2025 5:10 PM

Options trading can be one of the most profitable ways to make money, but understanding the terminology can be confusing if you're just getting started. Here are the key options terms you need to understand when trading options.

What is an option?

Options are contracts that give their owner the right, but not the obligation, to buy or sell an underlying asset such as a stock. Options come with an expiration date, after which the option either has value or expires worthless. The option's value depends on the price of the underlying asset.

Options can generate big profits in a short period of time, but you'll need to be right about the timing of the price change in the underlying asset as well as the move itself in order to profit.

Common options terms explained

Here are some of the most common options terms and definitions.

American-style option

American-style options can be exercised at any time prior to the expiration date.

At-the-money

An option is considered "at-the-money" if the strike price is equal to the price of the underlying asset. For example, a call or put option would be at-the-money if the stock price and the strike price were the same.

Call option

A call option gives its owner the right to buy the underlying asset at a specific price until the expiration date. The seller of the call option must sell the underlying asset at the strike price if the option is exercised.

European-style option

European-style options can only be exercised during a specific time period before expiration.

Expiration date

The expiration date is the day when the option expires. After expiration, the option no longer exists.

Holder

The holder of an option is the buyer and has the ability to exercise the option or not.

In-the-money

An option is considered "in-the-money" if it has intrinsic value. For example, a call option on a stock would be in-the-money if the stock price is above the strike price.

Intrinsic value

An option's intrinsic value refers to the in-the-money portion of the option premium. For example, if a call option has a strike price of $40 and the stock price is $45, the option has an intrinsic value of $5.

Open interest

Open interest refers to the number of open options contracts that have not been closed or settled.

Out-of-the-money

An option is considered "out-of-the-money" if it has no intrinsic value. For example, a call option on a stock would be out-of-the-money if the stock price is below the strike price.

Put option

A put option gives its owner the right to sell the underlying asset at a specific price until the expiration date. The seller of the put option is required to buy the underlying asset at the strike price if the option is exercised.

Strike price

The strike price, or exercise price, is the price that the option's owner can either buy or sell the underlying asset.

Time value

An option's time value is the portion of the option premium not attributed to its intrinsic value. For example, if a call option has a strike price of $40, a premium of $8, and the stock price is at $45, the time value equals $3, because the option's intrinsic value is $5.

Volume

Volume represents the number of options contracts traded over a specific time period, typically one day.

Writer

The writer of an option is the seller and is required to fulfill the obligations of the contract as long as the option is open.

Comments
Welcome to financetom comments! Please keep conversations courteous and on-topic. To fosterproductive and respectful conversations, you may see comments from our Community Managers.
Sign up to post
Sort by
Show More Comments
Related Articles >
Research Alert: CFRA Lowers Opinion On Shares Of Five Below Inc. To Hold From Buy
Research Alert: CFRA Lowers Opinion On Shares Of Five Below Inc. To Hold From Buy
Mar 21, 2024
12:35 AM EDT, 03/22/2024 (MT Newswires) -- CFRA, an independent research provider, has provided MT Newswires with the following research alert. Analysts at CFRA have summarized their opinion as follows: Our target price of $196, down $19, is 32x our FY 25 (Jan.) EPS view of $6.13 (down $0.60; we initiate FY 26's at $7.32), near the 32.6x, 1-year forward...
Research Alert: CFRA Raises Opinion On Shares Of Lululemon Athletica To Strong Buy From Buy
Research Alert: CFRA Raises Opinion On Shares Of Lululemon Athletica To Strong Buy From Buy
Mar 22, 2024
08:15 AM EDT, 03/22/2024 (MT Newswires) -- CFRA, an independent research provider, has provided MT Newswires with the following research alert. Analysts at CFRA have summarized their opinion as follows: We maintain our 12-month price target of $550, based on 37.9x our FY 25 (Jan.) EPS estimate and below the company's 5-year average forward P/E multiple of 42.7x. We maintain...
Research Alert: CFRA Lifts Opinion On Shares Of Archer-daniels-midland Company To Buy From Hold
Research Alert: CFRA Lifts Opinion On Shares Of Archer-daniels-midland Company To Buy From Hold
Mar 21, 2024
11:25 AM EDT, 03/12/2024 (MT Newswires) -- CFRA, an independent research provider, has provided MT Newswires with the following research alert. Analysts at CFRA have summarized their opinion as follows: We lift our 12-month target by $6 to $67, 10.9x our 2024 adj-EPS of $6.13 (up from $6.10; 2025's set at $6.34) vs. the 14x long-term average forward P/E. Q4...
Research Alert: CFRA Maintains Buy Opinion On Shares Of Apple Inc.
Research Alert: CFRA Maintains Buy Opinion On Shares Of Apple Inc.
Mar 22, 2024
08:20 AM EDT, 03/22/2024 (MT Newswires) -- CFRA, an independent research provider, has provided MT Newswires with the following research alert. Analysts at CFRA have summarized their opinion as follows: The U.S. is suing AAPL, accusing it of monopolizing the smartphone market by citing that AAPL makes it difficult for competitors to integrate with the iPhone, thus raising prices and...
Copyright 2023-2025 - www.financetom.com All Rights Reserved