An American style option is an option contract that may be exercised at any time between the date of purchase and the expiration date.
Assignment
If the buyer of the option decides to exercise his right, the seller is required to fulfill the obligation to either purchase or sell the underlying. In such a situation, the seller is said to be “assigned”. This generally occurs when the option is in the money.
4At-the-money
An option is said to be at the money if it would lead to zero cash flow if exercised immediately. In other words an option is at-the-money when the price of the underlying security is equal to the strike price.
Call Option
A Call Option gives the holder (buyer/one who is long), the right but not the obligation to buy a specified quantity of the underlying asset at the strike price for a specified time. The seller (one who has a short call) however, has the obligation to sell the underlying asset if the buyer of the call option decides to exercise his option to buy.
Class of options
Options contracts of the same type (call or put) and style (American or European) that cover the same underlying asset are said to belong to the same class.
European style option
A European Style Option is an option contract that may be exercised only at the expiration date.
Exercise
When you buy an option you have the right to either purchase or sell the underlying at a predetermined price. If you choose to execute your right and purchase or sell the underlying at the predetermined price, you are said to be “exercising your right”.
Exercise date
The date on which the option is actually exercised is called as Exercise Date.
In case of European Options the exercise date is same as the expiration date while in case of American Options, the options contract may be exercised any day between the purchase of the contract and its expiration date (see European/ American Option). In India, options on "Sensex" are European style, whereas options on individual stocks are American style.
Expiration date
The date on which the option expires is known as Expiration Date. On Expiration date, either the option is exercised or it expires worthless.
In-the-money
An option is said to be in the money if it would lead to a positive cash flow to the holder if it were exercised immediately. 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
Intrinsic Value refers to the amount by which an option is in the money.
Open Interest
Open Interest refers to the total number of options contracts outstanding in the market at any given point of time.
Option Buyer/ Holder
Option Buyer/ Holder is the one who buys an option, which can be a call, or a put option. He enjoys the right but not the obligation to buy or sell the underlying asset at a specified price on or before specified time.
His upside potential is unlimited while losses are limited to the Option Premium paid by him to the option writer.
Option Premium
Option Premium is the price paid by the buyer of the option to the seller of that option to acquire the right to buy or sell. In return, the writer of a call option is obligated to deliver the underlying security to an option buyer if the call is exercised or buy the underlying security if the put is exercised. The option writer keeps the premium whether or not the option is exercised. His profit potential is thus, limited to the extent of the premium, whereas the premium is the maximum loss that can be incurred by the buyer of the option.
Option Seller/ Writer
Option Seller/ Writer is the one who is obligated to buy (in case of Put option) or to sell (in case of call option), the underlying asset in case the buyer of the option decides to exercise his option. His profits are limited to the premium received from the buyer while his downside is unlimited.
Out-of-money
An option is said to be out of money if it would lead to a negative cash flow to the holder if it were exercised immediately. A call option is out of money if the strike price is greater than the market price of the underlying security. A put option is out of money if the strike price is less than the market price of the underlying security.
Put option
A Put option gives the buyer the right, but not the obligation, to sell an underlying security at a specific price for a specified time. The seller of a put option has the obligation to buy the underlying security should the buyer choose to exercise his option to sell.
Series
All option contracts of the same class which have the same strike price and expiration date are said to belong to the same series.
Example of an option series is BSXCJUN15000 which includes all Sensex Call options that are traded with Strike Price of 15000 & Expiry in June. (BSX Stands for BSE Sensex (underlying index), C is for Call Option, June is expiry month & Strike Price is 15000).
Spread
Spread is an arbitrage trading strategy which involves taking 2 opposite positions in two or more option contracts of the same type.
Strike price or Exercise Price
Strike Price or Exercise Price of an option is the specified/predetermined price of the underlying asset at which the same can be bought or sold if the option buyer exercises his right to buy/sell on or before the expiration date.
