Option Glossary

Options Glossary

American-style option: An option contract that may be exercised at any time between the date of purchase and the expiration date. Most exchange-traded options are American-style.

Assignment: The receipt of an exercise notice by an option writer (seller) that obligates the writer to sell (in the case of a call) or purchase (in the case of a put) the underlying security at the specified strike price.

At-the-money: An option is at-the-money if the strike price of the option is equal to the market price of the underlying security.

Call: An option contract that gives the holder the right to buy the underlying security at a specified price for a certain, fixed period of time.

Class of options: Option contracts of the same type (call or put) and style (American or European) that cover the same underlying security.

Closing purchase: A transaction in which the purchaser's intention is to reduce or eliminate a short position in a given series of options.

Closing sale: A transaction in which the seller's intention is to reduce or eliminate a long position in a given series of options.

Covered call option writing A strategy in which one sells call options while simultaneously owning an equivalent position in the underlying security.

Covered put option writing: A strategy in which one sells put options and simultaneously is short an equivalent position in the underlying security.

Derivative security: A financial security whose value is derived in part from the value and characteristics of another security, the underlying security.

Equity options: Options on shares of equity securities.

European-style option: An option contract that may be exercised only during a specified period of time just prior to its expiration.

Exercise: To implement the right under which the holder of an option is entitled to buy (in the case of a call) or sell (in the case of a put) the underlying security.

Exercise price: see Strike price.

Exercise settlement amount: The difference between the exercise price of the option and the exercise settlement value of the index on the day an exercise notice is tendered, multiplied by the index multiplier.

Expiration cycle: An expiration cycle relates to the dates on which options on a particular underlying security expire.

Expiration date: The last day in which holders of options must indicate their desire to exercise, if they wish to do so.

Hedge: A conservative strategy used to limit investment loss by effecting a transaction which offsets an existing position.

Holder: The purchaser of an option.

In-the-money: A call option is in-the-money if the strike price is less than the market price of the underlying security. A put option is in-the-money if the strike price is greater than the market price of the underlying security.

Intrinsic value: The amount by which an option is in-the-money (see above definition).

LEAPS: Long-term Equity AnticiPation Securities or LEAPS, are long-term stock or index options. LEAPS, like all options, are available in two types, calls and puts, with expiration dates up to three years in the future.

Long position: A position wherein an investor's interest in a particular series of options is as a net holder (i.e., the number of contracts bought exceeds the number of contracts sold).

Margin requirement (for options): The amount an uncovered (naked) option writer is required to deposit and maintain to cover a position. The margin requirement is calculated daily.

Naked writer: See Uncovered call writing and Uncovered put writing.

Opening purchase: A transaction in which the purchaser's intention is to create or increase a long position in a given series of options.

Opening sale: A transaction in which the seller's intention is to create or increase a short position in a given series of options.

Open interest: The number of outstanding option contracts in the exchange market or in a particular class or series.

Out-of-the-money: A call option is out-of-the money if the strike price is greater than the market price of the underlying security. A put option is out-of-the-money if the strike price is less than the market price of the underlying security.

Premium: The price of an option contract, determined in the competitive marketplace, which the buyer of the option pays to the option writer for the rights conveyed by the option contract.

Put: An option contract that gives the holder the right to sell the underlying security at a specified price for a certain, fixed period of time.

Secondary Market: A market that provides for the purchase or sale of previously sold or bought options through closing transactions.

Series: All option contracts of the same class that also have the same unit of trade, expiration date and strike price.

Short position: A position wherein a person's interest in a particular series of options is as a net writer or seller (i.e., the number of contracts sold exceeds the number of contracts bought).

Strike Price: The stated price per share for which the underlying security may be purchased (in the case of a call) or sold (in the case of a put) by the option holder upon exercise of the option contract.

Time Value: The portion of the premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.

Type: The classification of an option contract as either a put or a call.

Uncovered call option writing: A short call option position in which the writer does not own an equivalent position in the underlying security represented by his/her option contracts.

Uncovered put option writing: A short put option position in which the writer does not have a corresponding short position in the underlying security or has not deposited, in a cash account, cash or cash equivalents equal to the exercise value of the put.

Underlying security: The security subject to being purchased or sold upon exercise of the option contract.

Volatility: A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.

Writer: The seller of an option contract.

Taken from the Philadelphia Stock Exchange.