Stock options 101 includes options trading terms below.
Terms
The collective name denoting the expiration date, striking price, and underlying stock of an option contract.
Theoretical Value
The price of an option, or a combination of options, as computed by a mathematical model.
Theta
A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date.
Time Decay
A term used to describe how the theoretical value of an option “erodes” or reduces with the passage of time.
Time Value
The portion of the option premium that is attributable to the amount of time remaining until the expiration of the option contract. Time value is whatever value the option has in addition to its intrinsic value.
Underlying Security
The security subject to being purchased or sold upon exercise of the option contract.
Undervalued
Describing a security that is trading at a lower price than it logically should. Usually determined by the use of a mathematical model.
Unit of Trading
The minimum quantity or amount allowed when trading a security. The normal minimum for common stock is 1 round lot or 100 shares. The normal minimum for options is one contract (which normally covers 100 shares of stock).
Vega
A measure of the rate of change in an option’s theoretical value for a one-unit change in the volatility assumption.
Vertical Spread
Most commonly used to describe the purchase of one option and sale of another where both are of the same type and same expiration, but have different strike prices. Also used to describe a delta-neutral spread in which more options are sold than are purchased.
Volatility
A measure of the fluctuation in the market price of the underlying security. Mathematically, volatility is the annualized standard deviation of returns.
Write
To sell an option. The investor who sells is called the writer.
Be sure to understand all basic definitions associated with trading stock options. Happy investing!
