Options Basics
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Terms in this set
- Call Options A contract giving the buyer the right — not the obligation — to BUY 100 shares of the underlying at the strike price before expiration; the buyer is bullish, and the seller (writer) is obligated to deliver if exercised.
- Put Options A contract giving the buyer the right to SELL 100 shares of the underlying at the strike price before expiration; the buyer is bearish (or hedging a long position), and the writer is obligated to buy if exercised.
- Option Premiums The price of an option, made of intrinsic value (the in-the-money amount) plus time value (what remains); quoted per share, so a 3.50 premium costs $350 per contract.
- Covered Calls Writing a call against stock you already own: the premium provides income and a small downside cushion, in exchange for capping the stock's upside at the strike price.
- Protective Puts Buying a put on stock you own — insurance that locks in a minimum sale price (the strike) while leaving the upside open; the premium is the cost of the protection.
- Exercise & Assignment Exercise is the holder using the option's right; assignment is the OCC selecting a writer (by random allocation) to fulfill the obligation; American-style options exercise any time before expiration, European-style only at expiration.
- The OCC & the ODD The Options Clearing Corporation issues, guarantees, and clears all listed options, eliminating counterparty risk; the Options Disclosure Document (ODD) must be delivered to customers at or before account approval for options trading.