Options Terminology

At-the-Money (ATM): We call options ATM when the option’s strike price is the same as the current trading price of the underlying stock.

Call: An option contract that gives the buyer the right, but not the obligation, to purchase an underlying stock at a specific date.

Date-to-expiration (DTE): Refers to the number of days until an option expires.

Delta: One component of the Option Greek. It indicates the change in option’s price when the price of the underlying stock changes $1. Detail explanation here.

Exercise: The option can be exercised when it is ITM. Options exercised will get converted into underlying stock.

Expiration: The date on which an option contract expires; Option expires when it is OTM.

In-The-Money (ITM): The state of an option contract in which it has a positive value/intrinsic value when exercised.

Intrinsic Value: A measure of the value of an option when it gets exercised.

Out-Of-The-Money (OTM): The state of an option contract in which it has no intrinsic value.

Premium: The payment an option buyer makes to the option seller/writer when entering into an option contract.

Put: An option contract that gives the holder the right, but not the obligation, to sell an underlying stock at a specific date.

Return on Margin (ROM): Maximum potential profit (for a short position) divides by the total amount of margin used.

Time Value: Time value = Premium – Intrinsic Value. Time value will decrease with the passage of time. OTM option should only consist of Time Value.

Writer: The seller of an option contract.

Advertisements