Traded options definition
But here traded options definition present the standard textbook definitions for a whole slew of options terminology without any jokes, interjections or unnecessary asides. An equity call or put traded options definition is at-the-money when its strike price is the same as the current underlying stock price.
An underlying stock price at which an option strategy will realize neither a profit nor a loss, generally at option expiration. An equity option that gives its buyer the right to buy shares of the underlying stock at the strike price per share at any time before it expires. The call seller or writeron the other hand, has the obligation to sell shares at the strike price if called upon to do so. A settlement style that is generally characteristic of index options. Instead of stock changing hands traded options definition a call or put is exercised physical settlementcash changes hands.
A transaction that eliminates or reduces an open option position. A closing traded options definition transaction eliminates or reduces a long position.
A closing buy transaction eliminates or reduces a short position. The fee charged by a brokerage firm for its services in the execution of a stock or option order on a securities exchange. Any cash received in an account from the sale of an option or stock position. With a complex strategy involving multiple parts legsa net credit transaction is one in which the total cash amount traded options definition is greater than the total cash amount paid.
Any cash paid out of an account for the purchase of an option or stock position. With a complex strategy involving multiple parts legsa net debit transaction is one in which the total cash amount paid is greater than the total cash traded options definition received.
The exercise or assignment of an option contract before its expiration. This is a feature of American-style options that may be exercised or assigned at any time before they expire. A contract that gives its buyer owner the right, but not the obligation, to either buy or sell shares of a specific underlying stock or exchange-traded fund ETF at a specific price strike or exercise price per share, at any time before traded options definition contract expires.
With a complex strategy involving multiple parts legsan even money transaction results when the total cash amount received is the same as the total cash amount paid.
A security that represents shares of ownership in a fund or investment trust that holds a basket collection of specific component stocks. ETF shares are listed and traded on traded options definition exchanges just like stock, and so may be bought and sold throughout the trading day.
If you buy stock before the ex-dividend date, you traded options definition be eligible to receive the upcoming dividend payment. If you buy stock on the ex-date or afterwards, you will not receive the dividend. To employ traded options definition rights an equity option contract conveys to its buyer to either buy in the case of a call or sell in the case of a put shares traded options definition the underlying security at the strike price per share at any time before the contract expires.
A term of any equity option contract, it is the price per share at which shares of stock will change hands after an option is exercised or assigned. The day on which an option contract literally expires and ceases to exist. For equity options, this is traded options definition Saturday following the third Friday of the expiration month.
The last day on which expiring equity options trade and may be exercised is the business day prior to the expiration date, or generally the third Friday of the month. If the option is out-of-the-money, the extrinsic value is equal to the entire premium.
A measurement of the actual observed volatility of a specific stock over a given period of time in the past, traded options definition as a month, quarter or year. Implied volatility for any option can only be traded options definition via an option pricing model.
An equity call contract is in-the-money when its strike price is less than the current underlying stock price. An equity put contract is in-the-money when its strike price is greater than the current underlying stock price. Equity LEAPS calls traded options definition puts can have expirations up to three years into the future and expire in January of their expiration years.
Instead of entering one order to establish all parts of a complex position simultaneously, one part is executed with the hope traded options definition establishing the other part s later at a better price. With respect to stock prices over a traded options definition of time, a lognormal distribution of daily price changes represents not the actual dollar amount of each change, but instead the logarithms of each change.
So in a sense a lognormal distribution could be considered to traded options definition a bullish bias. A position resulting from the opening purchase of a call or put contract and held owned in a brokerage account.
Shares of stock that are purchased and held in a brokerage account and which represent an equity interest in traded options definition company that issued the shares. For a data set, the mean is the sum of the observations divided by the number of observations.
The mean is often quoted along with the standard deviation: One of the most familiar mathematical distributions, it is a set of traded options definition observed numbers or closing stock prices whose distribution is symmetrical around the mean or average number. Since this a symmetrical distribution, when the numbers represent daily stock price changes, for every possible change to the upside there must be an equal price change to the downside.
The result is that a normal distribution would theoretically allow negative stock prices. Stock prices are unlimited to traded options definition upside, but in the real world a stock can only decline to zero. A transaction that creates or increases an open option position. An opening buy transaction creates or increases a long position; an opening sell transaction creates or increases a short position also known as writing.
Generated by an option pricing model are the option Greeks: An equity call option is out-of-the-money when its strike price is greater than the current underlying stock price. An equity put option is out-of-the-money when its strike price is less than the current underlying stock price. The settlement style of all equity options in which shares of underlying stock change hands when an option is exercised.
The price paid or received for an option in the marketplace. Equity option premiums are quoted on a price-per-share basis, so the total premium amount paid by the buyer to the seller in any option transaction is equal to the quoted amount times underlying shares. Option premium consists of intrinsic value if any plus time value.
A representation in graph format of the possible profit and loss outcomes of an equity option strategy traded options definition a range of underlying stock prices at a given point in the future, most commonly at option expiration.
An equity option that gives its buyer the right traded options definition sell shares of the underlying stock at the strike price per share at any time before it expires.
The put seller or writeron the other hand, has the obligation to buy shares at the strike price traded options definition called upon to do so. Rolling a long position involves selling those options and buying others. Rolling a short position involves buying the existing position and selling writing other options to create a new short position.
A position resulting traded options definition making the opening sale or writing of a call or put contract, which is then maintained in a brokerage account. If the shares can be purchased at a price lower than their initial sale, a profit will result.
If the shares are purchased at a higher price, a loss will be incurred. Unlimited losses are possible when taking a short stock position. A complex option position established by the purchase of one option and the sale of another option with the same underlying security. A spread order is executed as a package, with both parts legs traded simultaneously, at a net debit, net credit, or for even money.
By definition, the premium of at- and out-of-the-money options consists only of time value. It is time value that is affected by time decay as well as changing volatility, interest rates and dividends. The fluctuation, up or down, in the price of a stock. To sell a call or put option contract that has not already been purchased owned. This is known as an opening sale transaction and results in a short position in that option. The seller writer of an equity option is subject to assignment at any time before expiration and takes on an obligation to sell in the case of a short call or buy in the case of a short put underlying stock traded options definition assignment does occur.
Options involve risk and are not suitable for all investors. For more information, please review the Characteristics and Risks of Standardized Options brochure before you begin trading traded options definition. Options investors may lose the entire amount of their investment in a relatively short period of time. Multiple leg options strategies involve additional risksand may result in complex tax treatments. Please consult a tax professional prior to implementing these strategies. Implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or the probability of reaching a specific price point.
The Greeks represent the consensus of the marketplace as to how the option will react to changes in certain variables associated with the pricing of an option contract. There is traded options definition guarantee that the forecasts of implied volatility or the Greeks will be correct. Ally Invest provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.
System response and access times may vary due to market conditions, system performance, and other factors. Content, research, tools, and stock or option symbols are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy.
The projections or other information regarding the likelihood of various investment outcomes are hypothetical traded options definition nature, are not guaranteed for accuracy or completeness, do not reflect actual investment results and are not guarantees of future results.
All investments involve risk, losses may exceed the principal invested, and the past performance of a security, industry, sector, market, or financial product does not guarantee future results or returns. The Options Playbook Featuring 40 options strategies for bulls, bears, rookies, all-stars and everyone in between. At-the-money An equity call or put option is at-the-money when its strike price is the same as the current underlying stock price.
Back month For an option spread involving two expiration months, the month that is farther away in time.
The best way to begin our introduction to options trading is to define exactly what options are. Although commonly referred to simply as options, the full term is options contracts, because they are financial contracts between two parties.
In very basic terms, they specify a future transaction on a specified asset at a specified price. The buyer of the contract has the right, but not the obligation, to initiate that specified transaction. The seller of the traded options definition has the related obligation to carry out the transaction should the holder choose to initiate it. There are several characteristics of options that essentially make up the terms for any given contract.
The easiest way to define an options contract is to identify those characteristics and explain what traded options definition are. We have done exactly that below, and we have traded options definition provided some example options to give a clear idea of what they are and how they work.
An options contract consists of two parties: The writer is effectively the seller of the contract, while traded options definition holder is effectively traded options definition buyer.
When the writer of the contract sells it to the buyer, they collect a payment from the buyer and that's commonly referred to as the premium. It's the holder of the contract that has the option to engage traded options definition the transaction that is specified and the writer that is obliged to engage in the transaction should the holder wish to traded options definition ahead. If the holder chooses to initiate the transaction specified in the contract, they are said to be exercising their option.
Should the holder not choose to exercise their option at any point, then the contract will eventually expire and cease to exist. You can read more about exercising an option here. Options are a form of derivative; which basically means they derive their value from an underlying asset.
In an options contract the underlying asset is the traded options definition which is specified in the transaction the holder has the right to carry out.
For example, a contract might give the holder the right to purchase stock in Company X, in which case Company X stock is the underlying asset. The term underlying security is also commonly used, but both terms refer to the same thing.
There's a range of financial instruments traded options definition can be the underlying asset in an option. Stock is the most commonly used asset, but bonds, indices, foreign currencies, commodities, or futures can all be used too. There are even basket options, in which the underlying asset is a collection of different assets.
The strike price is the price at which the specified transaction is to be carried out at should the holder choose to exercise their option. Strike price is the term most commonly used, but it can also be known as the exercise price. The expiration date of an option is, quite simply, the date on which the contract will expire.
Options are traded options definition relatively short term and last just a few weeks, although they can also last for a few months or traded options definition to a year. If the expiration date passes and the holder hasn't chosen to exercise their option, then the contract expires worthless. There are actually many different types of options, because they can be classified in a variety of different ways.
In a very broad sense though, they can be categorized based on whether they give the holder the right to buy or sell the underlying asset. In this sense, there are basically two main types; call options which give the holder the right to buy the underlying asset at the strike price, and put options which give the holder the right to sell the underlying asset at the strike price. It should be noted that you don't have to actually own any of the underlying asset to buy a put option, but if you choose to exercise your option to traded options definition the underlying asset you will, in theory, have to buy the underlying asset at that point.
Traded options definition see our section on the Types of Options for further details on this. Another way that options can be categorized is based on their exercise style.
They can basically be one of two styles: American style or European style. These terms have nothing to do with anything geographical though. An American style option is one where the holder can exercise their option at any time during the term of the contract, up to and including the date of expiration. A European style option is one where the holder can only exercise their option, should they wish to, at the point of expiration.
American style options clearly offer much more flexibility to the holder, and because of this they are generally more expensive to buy. When the holder exercises their option, the contract is effectively being settled, traded options definition there are two ways in which settlement can take place.
They are physical settlement and cash settlement. Physical settlement is where the underlying asset is actually transferred between the buyer and the holder at the agreed strike price. Cash settlement is where the traded options definition receives a cash payment based on any profit they could effectively make through exercising their option.
Please see Options Settlement for more details. When the writer of an options contract sells it to a buyer, the buyer makes a payment in order to purchase it.
However, the amount that the buyer pays isn't the same amount that the writer receives. Options are typically bought and sold on the public exchanges, where the transactions are facilitated by market makers. They basically exist to ensure that there's traded options definition a traded options definition for options contracts.
If traded options definition wishes to sell, and there is no buyer, then the market maker will act as the buyer and complete the necessary transaction. If someone wishes to buy, but there is no seller, then the market maker will act as the traded options definition. Market makers make a small profit on each transaction. Options contracts are listed on the exchanges with two prices: The bid price is the price you would receive for writing options contracts, and the ask price is the price you would pay for buying them.
It's important to note that options contracts aren't just sold to buyers at the time of being written; holders of existing options contracts can also sell them to other buyers. Again, the seller would receive the bid price and the buyer would pay the ask price. You can traded options definition more about the price of options here. To help you fully understand what an options contract is we have provided a couple of examples below, featuring some different characteristics.
The holder could exercise their option at any time because it's an American style options contract. If you didn't own traded options definition relevant stock, you would have to first buy it and then sell it on to the holder.
If the holder chose not to exercise their option by the expiration date, then it would expire worthless and your obligation would cease. Alternatively, you could hold on to the stock if you preferred. If you chose not to exercise your option by the expiration date, your contract would expire worthless. The holder could only exercise their option at that point as it is a European style option. Cash settlement options are typically settled automatically if the holder is effectively in profit.
As a cash settlement option, you could expect it to be automatically exercised if you were in profit. Definition of an Options Contract The best way to begin our introduction to options trading is to define exactly what options are.
Section Contents Quick Links. Parties Involved An options contract consists of two parties: Underlying Asset Options are a form of derivative; which basically traded options definition they derive their value from an underlying asset.
Strike Price The strike price is the price at which the specified transaction is to be carried out at should the holder choose to exercise their option. Expiration Date The expiration date of an option is, quite simply, the date on which the contract will expire. Option Type There are actually many different types of options, because they can be classified in a variety of different ways.
Option Style Another way that options can be categorized is based on their exercise style. Option Settlement When the holder exercises their option, the contract is effectively being settled, and there are two ways in which settlement can take place. Bid and Ask Price When the writer of an options contract sells it to a buyer, the buyer makes a payment in order to purchase it. Examples of Options Contracts To help you fully understand what an options contract is we have provided a couple of examples below, featuring some different characteristics.
Example 1 Underlying Asset: Stock in Company X Strike Price: Call Option Option Style: Physical Settlement Bid Price: Example 2 Underlying Asset: Stock in Company Y Strike Price: Put Traded options definition Option Style: Cash Settlement Bid Price: Read Review Traded options definition Broker.