When it comes to option investing, there are several terms that need to be understood before an investor can properly grasp what is going on with their option investments.
· Option Contract– The right, but not the obligation, to purchase or sell something for a specific period of time at an agreed upon price.
· Stock Option – The right, but not the obligation, to purchase or sell 100 shares of a specific stock during a set period at a specified price.
· Call Option – The right, but not the obligation, to purchase a specific stock at a set price for a set amount of time.
· Put Option – The right, but not the obligation, to sell a specific stock at a set price for a set amount of time.
· Exercise – To use the rights granted by an option. For example, to actually buy the stock at the price agreed upon with a call option.
· Expiration Date – The date on which the option, and the right to buy or sell, terminates. Options traded in the U.S. expire on the third Friday of a given month.
· Strike Price – The price at which an option may be exercised. In other words, the price that will be paid or received when the option is exercised.
· Underlying Stock – The stock to which the option applies.
· Option Price – The current market price of the option contract.
· Intrinsic Value – The difference between the current price per share of the underlying stock and the strike price.
· Time Premium – The difference between the option price and the intrinsic value of an option.
· In The Money – An option that would result in a profit if exercised and the stock position closed out. Also, and options whose strike price is lower (call) or higher (put) than the underlying stock price.
· Out of the Money – An option that would result in a loss if it was exercised and the underlying stock position closed out. Also, and options whose strike price is lower (call) or higher (put) than the underlying stock price.
· Deep In (Out) Of the Money – An option whose strike price is much lower (call) or higher (put) than the current price per share of the underlying stock.
Keep an eye out for other glossary of terminology articles in the Investing Channel.
Dividend Stock Investing Glossary