Glossary

At The Money Options (ATM)

At the money, the strike price of the underlying stock is equal to or very close to the option’s strike price. At the money option, contracts have no intrinsic value but only time value. At the money, the option can quickly move into profit or loss with small price changes.

Bear Call Spread

A Bear Call Spread, also known as a Short Call Spread or Call Credit Spread, is an options strategy that profits when the underlying asset's price declines or remains below the short call's strike price.

Bull Calendar Spread

A bull calendar spread is an options trading strategy that involves buying and selling call options with the same strike price but different expiration dates, where the longer-dated option is purchased, and the shorter-dated option is sold.

Call Option

A call option is a financial contract that gives the buyer the right, but not the obligation, to buy an underlying asset such as a stock or index at a fixed price before a specified expiry date. Traders usually buy call options when they expect the price of the asset to rise.

Delta Neutral

Delta neutral is a portfolio or trading strategy where the overall delta of the position is zero, meaning the portfolio's value does not change with small movements in the underlying asset's price.

Delta in Option

Delta is an option Greek that helps traders understand how much the price of an option is likely to change when the underlying stock price moves at specific points.

Exposure Margin

Exposure margin is a type of margin that brokers charge to help protect against market fluctuations and potential losses in futures and options (F&O) trading. It is often referred to as an additional margin.

Extrinsic Value

Extrinsic value is the portion of the option price that exceeds its intrinsic value and is attributed to external factors like time and volatility. Extrinsic value affects the cost of the option.

Gamma in Option Trading

Gamma measures the rate of change of an option’s delta with respect to changes in the underlying asset’s price. Gamma is a second-order derivative in options trading, and it helps traders understand how sensitive delta is to price movements.

Implied Volatility (IV)

Implied volatility reflects the market's expectations of the future volatility of an underlying security's price. Implied volatility is forward-looking volatility that directly implements the price of the option contract.

In the Money Option (ITM)

In the money option contract has intrinsic value, which means exercising at the in-the-money strike price will result in profit. In the money contracts, both call and put have a higher premium.

Intrinsic Value in Options

Intrinsic value is the real value based on the current market price of the underlying asset. Intrinsic value represents the minimum price an option should be worth, and it is always non-negative.

Long Put

A long put is when a trader buys a put option, expecting a stock’s price to fall. It can be used to make a profit if the price drops or to protect existing investments from losses.

Open Interest

Open Interest means the total number of outstanding option contracts that have not been settled. Open interest is a crucial indicator of market activity and liquidity, offering insights into the strength of price trends and potential future movements.

Option Buying

Option buying is a trading strategy where an investor pays a premium to purchase call or put options, giving them the right but not the obligation to buy or sell an underlying asset at a predetermined price before a certain date specified by the exchange.

Option Chain

An option chain is a comprehensive listing of all available options contracts for a specific underlying asset, such as a stock, index, or commodity. It provides traders and investors with detailed information to make informed decisions in options trading.

Option Margin

Margin in options is the capital a trader must maintain in their account when entering into certain options trades, especially when writing (selling) options.

Option Settlement

Option settlement is the process of finalising an options contract when it expires or is exercised. It can be a cash settlement, where money is paid for profit or loss, or a physical settlement, where the actual asset is given.

Option Writing

Option writing, also known as option selling, is the process of selling a call or put option, where the writer (seller) must fulfil the terms of the contract if the buyer exercises the option.

Options

An option is a type of derivative contract that gives the holder the right, but not the obligation, to buy or sell an underlying asset at a predetermined price before a specified date. Options are primarily used for hedging to mitigate risks and for speculation to seek potential profits.