INDEX OPTIONS: These options have the index as the underlying. Some options are European while others are American. Like index futures contracts, index options contracts are also cash settled.
STOCK OPTIONS:Stock options are options on individual stocks. Options currently trade on over500 stocks in the United State. A contract gives the holder the right to buy or sell shares at specified price.
BUYER OF AN OPTION: The buyer of an option is the one who by paying the option premium buys the right but not the obligation to exercise his option on the seller/writer
WRITER OF AN OPTION: The writer of a call/put option is the one who receives the option premium and is thereby obliged to sell/buy the asset if the buyer exercises on him. There are two basic types of options, CALL OPTIONS & PUT OPTIONS.
CALL OPTION: A call option gives the holder the right but not the obligation to buy an asset by a certain date for a certain price.
PUT OPTION: A put option gives the holder the right but not the obligation to sell an asset by a certain date for a certain price.
OPTION PRICE/PREMIUM:Option price is the price which the option buyer pays to the option seller. It is also referred to as the option premium.
EXPIRATION DATE:The date specified in the options contract is known as the expiration date, the exercise date, the strike date or the maturity.
STRIKE PRICE: The price specified in the options contract is known as the strike price or the exercise price.
AMERICAN OPTIONS:American options are options that can be exercised at any time up to the expiration date. Most exchange traded options are American. . ,
EUROPEAN OPTIONS: European options are the options that can be exercised only on the expiration date itself. European options are easier to analyze than American options, and properties of an American option are frequently deduced from those of its European Counterpart.
IN-THE-MONEY OPTION: An in-the-money (ITM) OPTION is an option that would lead to a positive cash flow to the holder if it were exercised immediately. A call option on the index is said to be in/-the-money when the current index stands at a lever higher than the strike price (i.e., spot price > strike price). If the index is much higher than the strike price, the call is said to be deep ITM. In the case of a put, the put is ITM if the index is below the strike price.
AT THE MONEY OPTION: An at-the-money option (ATM) is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is at-the-money when the current index equals the strike price (i.e., spot price = strike price).
OUT-OF-THE MONEY OPTION:An out-of-the money (OTM) option is an option that would lead to a negative cash flow if it were exercised immediately. A call option on the index is out of the money when the current index stands at a level which is less than the strike price(i.e., spot price < strike price). If the index is much lower than the strike price, the call is said to be deep OTM. In the case of a put, the put is OTM if the index is above the strike price.
INTRINSIC VA LUE OF AN OPTION: The option premium can be broken down into two components, INTRINSIC VALUE and TIME VALUE. The intrinsic value of a call is the amount the option is ITM, if it is ITM. If the call is OTM, its intrinsic value is zero.
TIME VALUE OF AN OPTION: The time value of an option is the difference between its premium and its intrinsic value. Both calls and puts have time value. An option that is OTM or ATM has only time value. Usually, the maximum time value exists when the option ATM. The longer the time to expiration, the greater is an option’s time value, all else equal. At expiration, an option should have no time value.
Learn option trading course from expert – Click Here
