Common Terms and Definitions in Options Trading

Common Terms and Definitions in Options Trading

Welcome, dear reader, to the world of options trading, a place where words like 'call', 'put', 'strike price', and 'expiry' are as common as 'hello' and 'goodbye'. It's a world that can seem a bit daunting at first, with its own unique language and rules. But fear not, for we are here to guide you through this labyrinth of terms, definitions, and phrases, to help you navigate the exciting world of options trading.

Let's start with the basics. In options trading, a 'call' is an option to buy an asset at a certain price within a specific period of time. A 'put', on the other hand, is an option to sell an asset at a certain price within a specific period of time. The 'strike price' is the price at which the asset can be bought or sold, and 'expiry' is the date when the option expires. If you're still a bit confused, don't worry. You can always refer to our article "What Are Options?" for a more detailed explanation.

Now, let's move on to some more advanced terms. 'Moneyness' refers to the relationship between the strike price of an option and the current price of the underlying asset. 'Implied volatility' is a measure of how much the market expects the price of the underlying asset to move. And 'time decay' refers to the decrease in the value of an option as it gets closer to its expiry date. For a deeper dive into these concepts, check out our article "Understanding Options Structures".

In the world of options trading, you'll often hear phrases like 'in the money', 'out of the money', and 'at the money'. These phrases refer to the moneyness of an option. An option is 'in the money' if it would be profitable to exercise it right now, 'out of the money' if it wouldn't be profitable, and 'at the money' if the strike price and the price of the underlying asset are the same. For a more detailed explanation of these phrases, you can refer to our article "Options Terminology Explained".

To help you understand these terms and phrases better, let's look at some real-world examples. Let's say you bought a call option with a strike price of 50,andthepriceoftheunderlyingassetiscurrently50, and the price of the underlying asset is currently 55. This option is 'in the money', because you can buy the asset for 50andsellitfor50 and sell it for 55, making a profit. For more real-world examples, you can check out this financial news website.

In conclusion, understanding these terms and phrases is crucial for successful options trading. It's like learning a new language - the more words you know, the better you can express yourself. So keep learning, keep exploring, and before you know it, you'll be speaking the language of options trading like a native. And remember, every journey begins with a single step. So why not take your first step by checking out our article "First Steps in Options Trading"?


  1. Financial Times