Although there are numerous terms that are used in the financial language,newbies need to understand initially the most important and commonly used words.
Option – is the right of the buyer to either purchase or sell the underlying possession at a fixed price and a set date. At the end of the agreement,the owner can exercise to either purchase or sell the choice at the strike cost. The owner has the right to pursue the agreement but she or he is not obliged to do so.
Call Option – provides the owner the right to purchase the underlying possession.
Put Option – provides the owner the right to sell the underlying possession.
Exercise – is the action where the owner can select to purchase (if call choice) or sell (if put choice) the underlying possession or,to overlook the agreement. If the owner chooses to pursue the agreement,he needs to send an exercise notice to the seller.
Expiration – is the date where the agreement ends. After the owner and the expiration does not exercise his or her rights,the agreement is terminated.
In-the-money – is a choice with an intrinsic value. The call choice is in-the-money if the underlying possession is higher than the strike cost. The put choice is in-the-money if the underlying possession is lower than the strike cost.
Out-of-the-money – is a choice without any intrinsic value. The call choice is out-of-the-money if the trading cost is lower than the strike cost. The put choice is out-of-the-money if the trading cost is higher than the strike cost.
Offsetting – is an act by which the owner of the choice exercises his right to purchase or sell the underlying possession prior to the end of the agreement. If the owner feels that the profitability of the stock has reached its peak within the date of the agreement,this is done.
(Option seller) Writer – is the seller of the underlying possession or the choice.
Option Seller – is the individual who obtains the rights to convey the choice.
Strike Price – is the cost at which the underlying stock needs to be sold or purchased if the agreement is exercised. The strike cost is plainly stated in the agreement. For the buyer of the choice to earn a profit,the strike cost should be lower than the present trading cost of the stock. For example,if the agreement mentions that the strike cost of a specific stock is $20 and the present trading cost at the end of the agreement is $25,the buyer can exercise his or her rights to pursue the agreement,thus earning $5 per stock.|For the buyer of the choice to make an earnings,the strike cost should be lower than the present trading cost of the stock. If the agreement mentions that the strike cost of a specific stock is $20 and the present trading cost at the end of the agreement is $25,the buyer can exercise his or her rights to pursue the agreement,thus earning $5 per stock.}
Alternative Premium – is the quantity of the agreement which should be paid by the buyer to the author (the seller). The quantity of the choice premium is figured out by several factors such as the kind of the choice (call or put),the strike cost of the present choice,the volatility of the stock,the time staying until expiration and the cost of the underlying possession to date. Taking into account these factors,the total quantity of the choice premium is number of choice contracts,increased by agreement multiplier. If you are buying 1 choice agreement (comparable to 100 share lots) at $2.5 per share,you should pay an overall quantity of $250 as the choice premium (1 choice agreement x 100 shares x $2.5 per share = $250).
The call choice is out-of-the-money if the trading cost is lower than the strike cost. For the buyer of the choice to make an earnings,the strike cost should be lower than the present trading cost of the stock. The quantity of the choice premium is figured out by several factors such as the type of the choice (call or put),the strike cost of the present choice,the volatility of the stock,the time staying until expiration and the cost of the underlying possession to date. Taking into account these factors,the total quantity of the choice premium is number of choice contracts,increased by agreement multiplier. If you are buying 1 choice agreement (comparable to 100 share lots) at $2.5 per share,you should pay an overall quantity of $250 as the choice premium (1 choice agreement x 100 shares x $2.5 per share = $250).