Introduction

Stock market jargon is full of arcane terminology to make laypeople feel like they need a financial background to invest. Despite their intimidating appearance, they are only simple ideas given a grandiose name. Given the specialised nature of options trading in the financial markets, we figured it would be a good moment to update our comprehensive glossary related to important options trading term.

Types of Options: Calls and Puts

The holder of a call option has the right to purchase shares of stock, whereas the holder of a put option has the opposite right. You may compare buying a call option to putting money aside for a future purchase.

Call Options

The holder of a call option has the right but not the duty to purchase the underlying security at the strike price until the option's cessation. In this case, the value of a call option will increase in tandem with the price of the underlying securities (calls have a positive delta).

Put Options

Put options allow the holder the right, but not the responsibility, to sell the underlying stock at the strike price on or before expiration, in contrast, to call options. Since the value of a long put increases as the price of the underlying security declines, holding one constitutes a short position in the underlying security (they have a negative delta). As a form of insurance, investors can purchase protective puts that set a minimum price at which they will not lose money.

Strike Price

The special price is a crucial trading word for either a call or put option. The "strike price" of a call option is the price at which the holder can purchase the underlying products. The strike cost of a put option is the price at which the option holder is permitted to sell the underlying stock. An investor is either "in the money" or "out of the money", depending on whether or not the stock's current price is higher than the strike price.

In the Money

It is common to practise discussing the direction of a stock's price, whether it is going up, going down, or staying the same, while discussing price changes. The success or failure of an investment is expressed in different terms when dealing with options. If the stock price is above the option's strike price, then the option is in the money. Depending on whether they own a call option or a put option, the direction of this change is different. A call option buyer is "at the money" if the strike price is lower than the underlying stock's current price. For illustration, suppose you buy a call option to buy shares at $50 per share while the actual price is $60 per share. If the share price rose by $10, you would be profitable.

Autotrading

Option transactions suggested by Schaeffer's Investment Research can be executed by a client's options broker as soon as the suggestion is received. You will still get a copy of the advice, but the auto trading broker will have some leeway in deciding whether or not to make trades based on your instructions. This dramatically improves your ability to enter and exit recommendations, even if temporarily absent from the market.

Black-Scholes formula

This option pricing model version is widely utilised in the standardised pricing on the trading floors of the various options exchanges. Current stock price, strike price, period till expiration, interest rates, dividends, and underlying security volatility are all considered. In 1997, the Black-Scholes model's co-developers, Merton H. Black and David M. Scholes received the Nobel Prize in Economics for developing a novel way to calculate the value of derivatives.

Settlement

A type of settlement typical of index options. After a call or put is exercised (physical settlement), cash is exchanged rather than shares of stock. The option seller (writer) is obligated to pay the option holder the cash value of the option upon exercise of an in-the-money contract.

Transaction

Amount of money deposited into an account due to the sale of an option or stock position. A net credit transaction occurs when the entire cash amount received exceeds the total cash amount paid in a complicated approach with numerous sections (legs).

Conclusion

An option is a type of contract that grants the consumers the right, but not the obligation, to purchase the investment product at a predetermined price on or before a predetermined date. However, the buyer is not required to exercise this right. Investors use options as a source of income, speculation, and risk management. Because its worth is derived from another asset, options are classified as derivatives. Options can be written on everything from bonds and currencies to commodities and stocks, with each contract representing 100 shares of the underlying asset.