Options Glossary

Below is a glossary of terms for options and glossary of options strategy. An option is the right to buy or sell a particular commodity or security at a certain price on or before a particular date. The options glossary below offers definitions of terms related to options which help you understand the basics of options, options theory and options trading. See also the Value of Options Glossary for terms relating to the value of an option.

Call option

A call option is the right to buy at a certain price.

Put option

A put option is the right to sell at a certain price.

Exercise price

An exercise price is also known as strike price in options trading. The exercise or strike price is the price at which the option buyer may exercise his option.

Premium

The premium is the cost of the option.

Covered call or covered put

An option written by someone who has the matching position in the underlying security is considered covered. For example, if an investor is short 10,000 shares and he writes a put on 10,000 shares then he ha has written a covered put.

European style option

An option which can only be exercised on the expiry date is a European styled option (vs. American style option).

American style option

An American style option can be exercised at any time up to the expiry date.

Volatility of an option

The volatility of an option is the measure of the magnitude of the price movements of the underlying instrument or security.

Implied volatility of an option

The implied volatility of an option is the value for volatility that given the price of the option would produce that price.

Delta

In options theory, the delta is the ratio of the amount of nominal of a security to the amount of the option that will hedge that option from local rate or price movements. This is the same as the amount by which the option moves for a unit change in the underlying instrument.

Delta neutral

Delta neutral is a portfolio or trading position where the option is fully hedged. Therefore the option is immune from the impact of local movements of the underlying but not immune from changes in volatility or to large movements.

Gamma

Gamma is the rate of change of the delta as the underlying instrument moves.

Warrant

The warrant is the securitized and therefore transferable option. Warrants are usually issued for relatively long period of time such as four or five years. In contrast, options (exchange traded or OTC) are usually issued with short maturities and are illiquid for longer expiries.