Although there are numerous terms that are used in the monetary language,novices have to understand first the most crucial and commonly used words.
Option – is the right of the purchaser to either buy or sell the underlying asset at a fixed price and a fixed date. At the end of the agreement,the owner can exercise to either sell the option or buy at the strike cost. The owner can pursue the agreement however she or he is not bound to do so.
Call Option – provides the owner the right to buy the underlying asset.
Put Option – provides the owner the right to sell the underlying asset.
Exercise – is the action where the owner can pick to buy (if call option) or sell (if put option) the underlying asset or,to overlook the agreement. If the owner chooses to pursue the agreement,he must send an exercise notice to the seller.
Expiration – is the date where the agreement ends. After the expiration and the owner does not exercise his/her rights,the agreement is ended.
In-the-money – is an option with an intrinsic worth. The call option is in-the-money if the underlying asset is higher than the strike cost. If the underlying asset is lower than the strike cost,the put option is in-the-money.
Out-of-the-money – is an option with no intrinsic worth. The call option is out-of-the-money if the trading cost is lower than the strike cost. The put option is out-of-the-money if the trading cost is higher than the strike cost.
Balancing out – is an act by which the owner of the option exercises his right to buy or sell the underlying asset before completion of the agreement. This is done if the owner feels that the success of the stock has reached its peak within the date of the agreement.
(Option seller) Writer – is the seller of the underlying asset or the option.
Option Seller – is the person who gets the rights to convey the option.
Strike Price – is the cost at which the underlying stock must be offered or purchased if the agreement is worked out. The strike cost is clearly specified in the agreement. For the purchaser of the option to earn a profit,the strike cost must be lower than the present trading cost of the stock. If the agreement specifies that the strike cost of a specific stock is $20 and the present trading cost at the end of the agreement is $25,the purchaser can exercise his or her rights to pursue the agreement,thus earning $5 per stock.|For the purchaser of the option to make a revenue,the strike cost must be lower than the present trading cost of the stock. If the agreement specifies that the strike cost of a specific stock is $20 and the present trading cost at the end of the agreement is $25,the purchaser can exercise his or her rights to pursue the agreement,thus earning $5 per stock.}
The amount of the option premium is figured out by a number of factors such as the type of the option (call or put),the strike cost of the present option,the volatility of the stock,the time remaining up until expiration and the cost of the underlying asset to date. If you are purchasing 1 option agreement (equivalent to 100 share lots) at $2.5 per share,you must pay a total amount of $250 as the option premium (1 option agreement x 100 shares x $2.5 per share = $250).
The call option is out-of-the-money if the trading cost is lower than the strike cost. For the purchaser of the option to make a revenue,the strike cost must be lower than the present trading cost of the stock. The amount of the option premium is figured out by a number of factors such as the type of the option (call or put),the strike cost of the present option,the volatility of the stock,the time remaining up until expiration and the cost of the underlying asset to date. Taking into account these factors,the overall amount of the option premium is number of option agreements,increased by agreement multiplier. If you are purchasing 1 option agreement (equivalent to 100 share lots) at $2.5 per share,you must pay a total amount of $250 as the option premium (1 option agreement x 100 shares x $2.5 per share = $250).