One of the harder things abut what I do is getting the options education level of my readers correctly. I?m too basic and I bore the readers who? know. I?m too advanced and I bore the one?s who do. So, let?s err on the side of caution and review some terminology.
- Call option: The right and not the obligation to buy an underlying asset at a fixed price at or within a fixed period of time
- Put option: The right and not the obligation to sell an underlying asset at a fixed price at or within a fixed period of time
- Strike Price: The price at which the underlying asset will be bought or sold if the option is exercised
- Exercise: Using the option right to buy or sell the underlying value at the strike price
- Assignment: When the seller of the option is required to buy or sell the underlying value at the strike price
- Physical delivery: The delivery of the actual asset upon assignment
- Cash settlement: Settling in cash the difference between the strike price and the settlement price upon expiration
- American style: The option may be exercised at any time during its lifetime (usually accompanied by physical?delivery)
- European style: The option may only be exercised at expiration (usually accompanied by cash settlement)
- Intrinsic value: The amount the call option strike is lower than the underlying value price or the put option strike is higher than the underlying value price (also known as In the Money)
- Out of the Money: There is no intrinsic value. The option price is based solely on time and volatility