Your Basic Options Trading Glossary – Understanding Options Trading Terminology

Look, options trading is quite a complicated area of the financial market. Here is our basic options trading glossary so you have a foundation to increase your knowledge further.

Strike Price – This is the underlying price that the stock can be purchased or sold at.

Exercised – Before a position can be exercised the price must go above (for calls) or below (for puts) the strike price before the position can be exercised.

Expiration Date – This is the time limit set by both the buyer and seller in which action must be taken dependent on the strike price being reached so the option can be exercised.

Options Exchanges – There are national options exchanges where trade can be done. When a deal is made through this avenue it is known as a listed exchange. One such exchange is the Chicago Board Options Exchange (CBOE).

Contract – When a deal is done on an options exchange there are fixed strike prices and expiration dates. Each listed options represent 100 shares of a stock otherwise known as a contract.

In-The-Money – You are considered “in-the-money” with a call option when the price goes above the strike price. Likewise with a put option if the price goes below the strike price you are “in-the-money” too.

Intrinsic Value - The amount of money you make on the option is called its intrinsic value.

Premium – This is the total cost (the price) of an option.

Time Value – This is the time remaining on the option before the expiration date.

Volatility – This is a term that states how high risk a certain option is.

Options Trading

This is a complicated subject but please bookmark this post Basic Options Trading Glossary so that you can come back to it a later date if at any point you get confused by the lingo. I know I did for the first few months when I was researching this part of the financial markets.

To learn more about this complex subject read our guide to the different Types Of Options.