Glossary

American style: Type of option contract which allows the holder to exercise at any time up to and including the Expiry Day.

Annualised return: The return or profit, expressed on an annual basis, the writer of the option contract receives for buying the shares and writing that particular option.

Assignment: The random allocation of an exercise obligation to a writer. This is carried out by the exchanges.

At-the-money: When the price of the underlying security equals the exercise price of the option.

Buy and write: The simultaneous purchase of shares and sale of an equivalent number of option contracts.

Call option: An option contract that entitles the taker (buyer) to buy a fixed number of the underlying shares at a stated price on or before a fixed Expiry Day.

Class of options: Option contracts of the same type – either calls or puts - covering the same underlying security.

Delta: The rate in change of option premium due to a change in price of the underlying securities.

Derivative: An instrument which derives its value from the value of an underlying instrument (such as shares, share price indices, fixed interest securities, commodities, currencies, etc.). Warrants and options are types of derivative.

European style: Type of option contract, which allows the holder to exercise only on the Expiry Day.

Exercise price: The amount of money which must be paid by the taker (in the case of a call option) or the writer (in the case of a put option) for the transfer of each of the underlying securities upon exercise of the option.

Expiry day: The date on which all unexercised options in a particular series expire.

Hedge: A transaction, which reduces or offsets the risk of a current holding. For example, a put option may act as a hedge for a current holding in the underlying instrument.

Implied volatility: A measure of volatility assigned to a series by the current market price.

In-the-money: An option with intrinsic value.

Intrinsic value: The difference between the market value of the underlying securities and the exercise price of the option. Usually it is not less than zero. It represents the advantage the taker has over the current market price if the option is exercised.

Long-term option: An option with a term to expiry of two or three years from the date the series was first listed. (This is not available in currently in India)

Multiplier: Is used when considering index options. The strike price and premium of an index option are usually expressed in points.

Open interest: The number of outstanding contracts in a particular class or series existing in the option market. Also called the "open position".

Out-of-the-money: A call option is out-of-the-money if the market price of the underlying securities is below the exercise price of the option; a put option is out-of-the-money if the market price of the underlying securities is above the exercise price of the options.

Premium: The amount payable by the taker to the writer for entering the option. It is determined through the trading process and represents current market value.

Put option: An option contract that entitles the taker (buyer) to sell a fixed number of underlying securities at a stated price on or before a fixed Expiry Day.

Random selection: The method by which an exercise of an option is allocated to a writer in that series of option.

Series of options: All contracts of the same class having the same Expiry Day and the same exercise price.

Time value: The amount investors are willing to pay for the possibility that they could make a profit from their option position. It is influenced by time to expiry, dividends, interest rates, volatility and market expectations.

Underlying securities: The shares or other securities subject to purchase or sale upon exercise of the option.

Volatility: A measure of the expected amount of fluctuation in the price of the particular securities.

Writer: The seller of an option contract.

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