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Glossary- Options Trading

Trading

Megha Parmar

16 Dec, 2022
8 mins read

If you’re new to options trading, chances are you don’t know all the jargon yet. And even if you’re a seasoned pro, there might be some terms you’re not familiar with. That’s why we created this options trading glossary to help you better understand the language of options trading.

This blog post will give you a quick rundown of some of the most common terms you'll come across. By the end, you'll be better equipped to make informed decisions about your trades. So without further ado, let's get started.

  • Algo Trading

Using software programs for automatic trading is known as "algorithmic trading."

  • At-the-money (ATM)

Options prices with equal strike prices are referred to as ATMs.

  • Assignment in Options

The process by which a buyer or seller honors the option contract rights is described as an "assignment."

  • American Option

An American option may be exercised at any time up until its expiration date.

  • Bear Call Spread

This trade involves taking a BUY and SELL position on the same underlying, but with different strike prices.

  • Box Spread

A call and put option-based arbitrage strategy developed for risk-efficient profit.

  • Box Spread Strategy

When the underlying is under-priced, options arbitrage can be used.

  • Break-Even Point (BEP)

A price at which an option contract is neither profitable nor losing.

  • Bull Call Spread

A trade position in which you buy and sell the same option at different strike prices, but with the same underlying and expiry.

  • Call Option

An option contract where the buyer is given the choice but not the obligation to purchase the underlying at the agreed-upon price and time.

  • Delta Option Greek

The delta of an option is a measure of how much it changes with a change in its underlying price.

  • European Option

Expiration dates are the only dates on which European Options can be exercised.

  • Exercising Options

Exercise of the Option refers to a trader's choice to use an Option contract's right.

  • Expiry

The expiration date for an option contract is usually the last Thursday of the month.

  • Gamma Option Greek

Gamma measures how the delta of an option changes as the underlying changes.

  • In-the-money (ITM)

Options are said to be in the ITM when their price has risen above the strike price.

  • Index Options

Option contracts using index underlyings, such as NIFTY 50 or Bank Nifty, are termed index options.

  • Options Contract

This type of contract allows a buyer to buy an asset on a specific date and at a specified price, but does not obligate them to do so.

  • Options Fair Market Value

It is the theoretical price of an option based on options pricing models.

  • Options Hedging

Hedging can be accomplished with option contracts.

  • Options Market

The marketplace where traders can buy and sell options.

  • Options Premium

An Option's premium is the amount that either the Options Buyer or the Options Seller pays or receives.

  • Options Secondary Market

A market where NSE and BSE previously issued options are traded.

  • Options Spread

Taking two positions—buy and sell—on an option with the same underlying and expiration date results in a spread.

  • Options Trading App

Options trading can be done on a mobile device, anytime, anywhere.

  • Over The Counter (OTC) Options

An option traded off an exchange like the NSE or BSE is called an OTC option.

  • Paired Option Contracts

A trader can take two positions on the same option in a single order.

  • Put Option

An option contract involves the buyer being able to sell underlying on a specified date and at a specified price, but not being obligated to do so.

  • Options Writer

Option Writer refers to the person who sells an option.

  • Volatility

Volatility is a term used to describe how quickly an option's underlying price can change.

  • Volume in Options

Volume in Options serves as a gauge of traders' interest in a specific Option.

  • Rho Option Greek

With each percentage change in interest rates, Rho calculates the change in an option's price.

  • Short Option

A short option is a position in which an option is sold by a trader.

  • Post-market Trading Hours (Post Close Trading Session)

During this session, shares are traded at a predetermined price between 3:40 and 4:00 PM.

  • Pre-Market Trading hours

The order entry and order matching periods are split into two sessions that take place from 9 to 9:30 AM.

  • Option Market Participants

Participants in the options market can be divided into Hedgers, Speculators, and Arbitrageurs based on their risk tolerance and trading style.

  • Out-of-the-money (OTM)

Option prices are referred to as being in the OTM when they have not yet reached the strike price.

  • Option Tick Size

The smallest amount by which an option contract's price can change.

  • Spot Price

Spot Price refers to the underlying of an option's current market price.

  • Synthetic position

To create a single Option, it uses various types of options.

  • Theta Option Greek

Theta measures how much an option's price changes as time moves closer to its expiration.

  • Time decay or erosion

Time decay is the term used to describe the decline in an Option's value over time.

  • Vega Option Greek

Vega calculates how the price of its Option is affected by a change in the underlying's volatility.

  • Squaring Off an Option

You are selling an option whose underlying, expiration date and strike price are the same as those you previously purchased.

  • Strike price or exercise price

The precise cost at which an Option is bought. At this Price, the buyer receives the right to exercise his Option.

  • Uncovered call writing

Without owning the underlying, selling a call option.

  • Vertical spread option strategy

Buy/sell of Put and Call options are included in this two-legged strategy.

  •  Long Option

The term "long option" describes a position in which a trader buys an option.

  • Mark-to-Market Settlement (MTM)

Settlement on mark-to-market (MTM) is the process by which a trader's profits or losses are adjusted from his or her account on the same day.

  • Open Interest (OI)

Open interest (OI), a derivative indicator, shows how many pending derivatives, like options or futures, are unresolved at any given time.

  • Option Writer or Option writing

One who sells or shorts an option while maintaining ownership of the option's underlying is known as an option writer.

  • Lot Size

A lot size refers to how many shares of the underlying are represented in an Option contract.

  • Moving averages

It is applied to forecast an Option's specific trend's direction.

  • Option Greeks

Options Greeks assist a trader in determining how an Option’s price changes due to various changing factors.

  • Long position

Option purchases are called long positions.

 

Final Words:

The terms "vertical spread option strategy," "lot size," "option Greeks," "long positions," and so on were some of the jargon or definitions of stock option trading that we covered in this blog. The following are the main ideas to remember from this post:

  • If one expects that an asset's price will increase, it is advisable to buy a call option.

  • Due to the time factor, it is important to keep the strike price close to the current price to prevent quick premium decay.

  • Asset spot prices are the underlying price.

  • Every Thursday, weekly options contracts expire, and monthly options contracts expire on the last Thursday of the month. It expires on the previous day if Thursday is a holiday.

  • In India, options are settled in cash.

Using the financial instrument to achieve one's own financial objectives and financial independence requires a clear understanding of the complexity of the instrument.

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