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Expiration Day:
It is the last day on which the contracts expire. Futures and Options contracts expire on the last Thursday of the expiry month. If the previous Thursday is a trading holiday, the contracts expire on the previous trading day. For example, the January 2018 contracts mature on January 31, 2018. -
Strike Price:
The pre-agreed price per share at which stock may be bought or sold under the terms of an option contract. Some people refer to the strike price as the “exercise price”. -
Long:
When you’re talking about options and stocks, “long” implies a position of ownership. After you have purchased an option or a stock, you are considered "long" that security in your account. -
Short:
If you've sold an option or a stock without actually owning it, you are then considered to "short" that security in your account. That's one of the exciting things about options. You can sell something you don't own. But when you do, you may be obligated to do something at a later date. -
In- the- money options (ITM):
An in-the-money option is an option that would lead to positive cash flow to the holder if it were exercised immediately. A call option is said to be in-the-money when the current price stands at a level higher than the strike price. If the spot price is much higher than the strike price, a call is said to be a deep derivatives trading in-the-money option. In the case of a put, the put is in-the-money if the spot price is below the strike price. -
At-the-money-option (ATM):
An at-the-money option is an option that would lead to zero cash flow if it were exercised immediately. An option on the index is said to be “at-the-money” when the current price equals the strike price. -
Out-of-the-money-option (OTM):
An out-of-the-money option is an option that would lead to negative cash flow if it were exercised immediately. A call option is out-of-the-money when the current price stands at a level which is less than the strike price. If the current price is much lower than the strike price, the call is said to be deep out-of-the-money. In case of a put, the put is said to be out-of-money if the current price is above the strike price. -
Intrinsic Value:
The inherent value of an option is the amount of profit that can be theoretically obtained if the option is exercised at that moment and the stock either purchased (for calls) or sold (for puts) at the current market price. If an option has positive intrinsic value, it is said to be "in-the-money" (ITM), and if it has negative intrinsic value, it is said to be "out-of-the-money" (OTM). For instance, an XYZ stock's May 25 Call would have Rs. 1.50 of intrinsic value if the stock were trading at Rs. 26.50, regardless of its market price at the time. -
Time Value:
Time value is the amount by which an options market price exceeds its intrinsic value. In the case above with the XYZ May 25 call priced at Rs 3 while XYZ stock is trading at Rs. 26.50, the inherent value is Rs. 1.50 and the remaining Rs. 1.50 is time value. If an option is out-of-the-money (i.e. has no intrinsic value), then the entire market price is considered time value. -
Premium:
The price of an option is called its premium. Rates are quoted per share, but the premium is usually the entire dollar value of the contract (Price per share X 100 shares = total premium). -
Time Decay:
Because options have an expiration date, all options are wasting assets whose time value erodes to zero by expiration. This erosion is known as time decay. Time value varies with the square root of time, so that as an option approaches its expiration date, the rate of time decay increases.
Difference between options and equities
Stock prices are based primarily on market forces, company fundamentals such as the company's earnings outlook, the success of products, etc. Option prices are based in no small degree on the price of the underlying stock, time to expiration and other factors. Regular equities can be held for an indefinite time while options have an expiry date. Like ordinary equities, an option does not have physical certificates. Owning an option does not mean right to ownership of any share or dividends of a company unlike in equities.
Over the Counter Market (OTC)
Over the counter market is a decentralised market, which does not have a physical location, where market traders or participants trade with one another through various communication modes such as telephone, e-mail and proprietary electronic trading systems.
